When debt funds become unattractive!!!

When interest rates rise, bond prices come down, which, in turn, reduces the net asset value (NAV) of debt funds. On the other hand, falling interest rates result in a spike in the prices of the underlying bonds, leading to a rise in the NAV. So, when interest rates are increasing, debt funds become unattractive. 

So how to get benefit from debt funds when interest rates are increasing:

1. Go for funds with short maturities:
Shorter duration funds are not affected as much by interest rate fluctuations as the long-term ones.
The best way to select debt funds is to look at their maturities, apart from the quality of underlying assets and the liquidity offered. So, in the current scenario, buying a debt fund with a shorter average maturity will be a better choice. Not only will you earn higher returns, but will also benefit from better liquidity.

2. Adjust your Portfolio
 Depending on the interest rate outlook, investors should alter their debt portfolios in favour of products with suitable maturities. So, if the rates are falling, you should invest in longer maturity debt funds, such as income funds and gilt funds. However, in a rising rate scenario, short duration plans such as liquid funds, ultra short-term funds and fixed maturity plans (FMPs) are the right choices. 




Source:Economic Times of India