Interim Budget 2024-25: Debt Mutual Funds Gain in Favour

Long-term debt mutual funds have emerged as an ideal choice for investors to make the most of capital appreciation. Considering the Interim Budget 2024-25 has set a lower borrowing target for the next fiscal year, it will reduce the supply of government paper and push down yields. So, when bond yields experience a dip, prices spike, and long-term bond funds gain the most.

Experts suggest that investors could consider betting on long-term debt funds after the Interim Budget due to various reasons. First, the projected fiscal deficit for the financial year (FY) 2025 and the expected decline in gross market borrowings highlight positive prospects for the bond markets.

Second, the Reserve Bank of India’s (RBI’s) consistent pause stance since April 2023 and the global bond inclusion will further push the flow to the debt segment, give a fillip to demand, and strengthen investor confidence.

Typically, debt funds are a type of mutual fund that invests in fixed-income instruments such as government securities (G-Secs), corporate bonds, and money market instruments. These investment tools pay a fixed interest rate, which is known as the coupon rate. When investors invest in a debt fund, they typically pool their money with other investors to buy a diversified portfolio of these fixed-income securities.

When it comes to debt funds, there are several varieties, and an investor can differentiate them based on the underlying securities in which they invest. As professional fund managers manage debt mutual funds, they can offer a better return as compared to choosing a specific debt instrument for investments.

Also, considering debt funds are market-linked products, they are at times likely to become highly volatile.

Experts believe that debt mutual funds with medium- to long-term maturity, especially long-term gilt funds and dynamic bond funds, are anticipated to perform well,  with some short-term volatility notwithstanding.

When it comes to choosing a debt fund, it is crucial to consider their individual investment goals and risk appetite. An investor must also carefully consider the fund’s expense ratio, the percentage of the investment used to cover the fund’s operating expenses. Moreover, it’s crucial to focus on the diversification of the portfolio to lower the risk. 

Finally, debt funds can be an ideal way to generate reliable income and reduce the overall investment risk. However, choosing the right type of debt fund depends on an individual’s needs, and carefully considering the risks involved is essential.

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