• HDFC
• 31 Jul 2018
• MF Product

HDFC, Tester

Looking for short term investments, but scared to lose money? The solution to your problems are Debt Funds! These funds invest in fixed-interest generating securities like government bonds, corporate bonds and other money market instruments.

 

Debt funds are recommended in every financial portfolio as a shield against stock market volatility.

 

Why Debt Funds?

For capital security: This low-risk financial instrument is often compared to fixed deposits (FDs). However, the returns from debt funds are higher than the banks FDs and are ideal for someone with low risk appetite.

 

For the Liquidity: As most of the debt funds are open-ended, investors have the choice to exit or enter at any given time.

 

For the Time horizon: Whatever time horizon you have, there is a debt fund available, even for as short as three months!

 

For regular cash flows: Go for Systematic Withdrawal Plan (SWP) and enjoy a steady income.

 

For Diversification: Portfolio of debt funds are more diversified and therefore, the returns are more stable.

 

How do Debt Funds work?

When people invest in a debt fund, the money is invested in government & corporate bonds, which may be for a long term or short term. The interest earned on thebonds is then passed on to the investors.

 

Just like the stock market, there is a debt market where bonds are traded, and prices of various bonds rise and fall daily. Therefore, if your debt fund has bought a particular bond whose price rises later, then the investor will not only gain from the interest earned on the bond, but also from the price rise.

 

Fluctuation in bond prices depend mainly on interest rates’ increase or cut announced by the RBI. For example, if a bond pays 6% per annum and then RBI announces a rate cut of 5%, then the new bonds will be issued at 5% and the earlier bond will automatically be demand. Nevertheless, if the RBI announces an increase in the interest rates, the bond offering 6% may see a drop in the demand and price.

 

So, one can conclude that the bond prices in the debt market and the interest rates are inversely proportional. 

 

When is a good time to invest in Debt Funds?

A good time to invest or stay invested in debt funds can be when interest rates and inflation are high, but a cut in interest rates is anticipated. Investing at this point may be seen asirrational, but once the interest rates fall to bring inflation in control, the bonds issuing higher interest rates will be in demand. And that’s how the money will be made. Historical data shows that whenever high inflation-high interest rates have made the economy uncomfortable, it’s been a good time in invest in debt markets.