Debt mutual funds have emerged as a preferred investment tool for their higher returns. In fact, some of the best debt funds of 2022 have delivered almost 10-25% returns.
Debt fund schemes, which had experienced net outflows of Rs 2,818 crore in October 2022, recorded net inflows of Rs 3,669 crore in November 2022, as per the Association of Mutual Funds in India (AMFI) data.
Long-term debt funds are a category that invests in debt instruments such as corporate debentures, bonds and money market instruments and government securities with a higher maturity period. These invest in debt and money market instruments such that the Macaulay Duration of the portfolio is more than seven years. Macaulay Duration relates to the time taken for the principal amount of a bond to be repaid from the internal cash flows generated by the bond.
Also, it needs to be considered that long-duration debt funds may provide higher returns but remain more sensitive to any interest rate changes. They tend to be more volatile as compared to other categories of debt funds.
Interest rates and prices of the debt instruments have an inverse relationship. This means that they move in opposite directions. For example, a dip in interest rate is good for debt funds or bond funds. Generally, long-term debt fund benefits in case the interest rates are moving downwards. As interest rate dip, the bond prices shoot up and this gives a boost to the net asset values (NAVs) of the debt fund schemes.
Investors with a certain level of risk appetite and who want to invest for a longer duration but prefer a comparatively less risky asset class than equity funds can consider investing in such debt funds.
Ideally, investors with an investment horizon of more than three years can consider investing in long-term debt funds.
Rajiv is an independent editorial consultant for the last decade. Prior to this, he worked as a full-time journalist associated with various prominent print media houses. In his spare time, he loves to paint on canvas.