The yields have witnessed an uptick for the government securities (G-Secs) against the backdrop of the ongoing Israel-Palestine conflict and its impact on oil and uncertainty on the Reserve Bank of India’s (RBI’s) liquidity actions. For example, the 10-year G-Sec annualised yield was 7.5% as of October 20, 2023.
Generally, debt mutual fund investments comprise various securities such as corporate bonds, G-Secs, treasury bills (T-Bills), and commercial papers (CPs), among others.
When compared with equity mutual funds, debt funds are relatively more stable, yield regular income, and have a low to moderate risk, as per the sub-category. The fact is that debt funds invest in debt products that offer any investor predictable returns, tend to carry much lower risk and are less volatile.
Through a systematic transfer plan (STP), debt funds offer flexibility to an investor to spread out the risk of investing in the equity market. In order to begin the journey, an investor can look at investing in the different duration-based debt fund options that are available.
In this case, the duration refers to the interest rate risk of the fund and highlights how much the fund’s net asset value (NAV) moves when yields change. High-duration funds will experience a greater jump in NAV when yields dip than low-duration funds, all else equal.
Typically, bond prices and yields move in opposite directions. It is important that this works in reverse, too. On an overall basis, yields are likely to trade in a range, taking into account local and international factors.
While experts recommend investments into short to medium-duration debt funds, considering the sharp rise in yields in the past few months, investors could consider a higher allocation to longer-duration funds in a staggered manner based on their respective risk appetite.
Lastly, investors must reach out to a professional financial advisor or expert before making their investment decisions.
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.
