The year 2022 is started so does the opportunites of investing are emerging. And today we are going to discuss how investing in debt funds would be easier in 2022. This guide is here to help you on how to invest in debt market during 2022? What time frame one should consider while investing in debt funds? Where to invest and what to avoid everything is here in one guide.
In markets, selecting a right fund is a task. This is especially true when the markets are at a peak. Moreover, India’s debt or fixed income market is going through a peculiar phase. Interest rates are at a decade low. Expectations are high about interest rates going up. Inflation is high and the real rate of interest – that is nominal rate of interest minus the rate of inflation, is negative. In the context of these facts, a bond investor is facing a situation of how to select a scheme which could help her earn respectable return. Here are some debt funds you can invest in the present fiscal:
Most financial planners advise this strategy. If you want to invest for a specific period of time then pick up a mutual fund product which offers similar duration. So, if you are keen to invest for a fortnight, you should stick to either overnight fund or liquid fund. If you are keen to invest for 2-3 years, then short duration fund makes sense. It ensures that you are not exposed to interest rate risk. It works best when you have clearly defined financial goals and you have a financial plan suitable for you.
But not all have financial plans in place. For these, here are some interesting debt fund ideas:
Passively-managed G-Sec index funds and ETFs tracking PSU bond indices with three to five year duration can be an attractive investment option at this moment. Though interest rates are expected to go up, the pace and quantum of rate hikes may not be aggressive. If interest rates go up gradually and the quantum is not too large, then these products may not be much volatile, though they are exposed to interest rate risk. These debt funds offer attractive yield-to-maturity returns to investors in a high inflationary backdrop compared to short end of yield curve – be it liquid fund or ultra short duration fund.
These debt fund schemes invest in government securities. They carry no default risk. This makes it ideal for moderate to conservative investors. However, fund managers of these schemes keep changing the duration of schemes depending on their view on interest rates and relative attractiveness of interest payable on bonds. Investors should not however ignore the risk of a fund manager going wrong on his trade. Such schemes over three year timeframe can be rewarding even in a rising interest rate scenario.
Investing in any debt fund product, especially long duration funds looking at their past performance can be a big mistake. Long duration funds did well when interest rates fell. In the coming months, if interest rates move up quickly, long duration funds are more likely to lose money. It is important to avoid investing in high expense ratio schemes and schemes where fund managers are taking credit risk to enhance returns. While the former eats into the returns the later increases the risk for the investors.
It was all about how to invest in debt funds during year 2022. Debt funds can be a smart move because it can help them save money on taxes or lower their exposure to stocks that have high risk exposure. The article is providing readers with an idea of what to look for when they invest in debt funds and what they should expect from these investments. They also advise investors to diversify their portfolio by investing in other asset classes besides just stocks or bonds.
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