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Why You Should Re-evaluate Your Debt Fund Strategy

Adhil Shetty

It is wise to keep a few points in mind as you examine your holdings in light of the ongoing financial environment.

The higher fiscal deficit target announced in the recent Union Budget, along with certain signs pertaining to the interest rate scenario by the Reserve Bank of India may spell some volatility in the bond market, and consequently, have you rethink your tactics within the debt component of your Mutual Fund portfolio.

As always, it isn’t advisable to go for wholesale changes outright. However, it is prudent to keep a few points in mind as you examine your holdings in light of the ongoing financial environment.

Shorter Maturity Funds

The benchmark 10-year bonds started to sag after the government set the new fiscal deficit target. This led to a hit in long-term debt schemes, including income funds and GILT funds. As an investor, you are therefore best advised to stick to short term funds or accrual funds to overcome any volatility. You can also explore whether Fixed Maturity Plans (FMPs) have a place in your portfolio – if you are willing to take on some risk.

Juggling Portfolio

In any case, if you find your holdings distributed with a tilt toward longer duration debt funds, you should strongly consider changing such an allocation as described above, as the investment will not be entirely risk-free. Since you invest in fixed income for relatively stable returns, you should ideally insulate your portfolio from such factors and the risks therein.

Consider SIPs

Traditionally, Systematic Investment Plans (SIPs) are strongly associated with equity mutual funds. To override the phenomenon of volatility seen in the last few months, you can consider a similar approach with Debt Funds, particularly those which have a higher relatively maturity of the underlying bonds. In case you don’t possess a lumpsum amount to invest and are merely looking to channel money at regular intervals, this will occur naturally over time.

All in all, a rate hike cannot be ruled out in the coming months. Since a rising interest rate scenario is bad news for debt funds in general, you should quantify the inverse relationship between bonds and prices and take a call on your mutual fund portfolio using the pointers mentioned above.

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