Set your debt fund investment strategies today

In order to ensure that we are able to create long term wealth, we must invest in investment products that are ideal for our short term or long term financial goals. When choosing an investment product, investors need to ensure that they choose an asset class that is ideal for their risk appetite. Most of us are aware that equity as an asset class is for investors with a very high risk appetite who are willing to take greater risks with the hope of generating better capital appreciation over the long term. On the other hand, debt as an asset class may allow investors to generate stable returns with moderate to low investment risk depending on what type of scheme they invest in.

Through debt mutual funds, investors get an opportunity to invest in several money market instruments. Depending on their risk tolerance, investment horizon, and investment objective investors can consider investing in an appropriate debt mutual fund scheme. Investors looking for a debt mutual fund investment strategy in 2021 may have to look at how this asset class has performed in the previous and take learnings from the same.

While it was evident that the 2020 pandemic would drive equity markets to volatility, a few people assumed that their debt mutual fund portfolio will remain unharmed. However, debt mutual funds too were under tremendous liquidity pressure.

How can investors strategize their debt fund investments in 2022?

One way to strategize investments in debt mutual funds is to adopt a goal based investment strategy. If your investment objective is to park your money for the short term, let’s say 12 to 18 months, in this scenario you may consider investing in short term debt schemes. On the other hand, investors with longer investment horizons may consider long duration funds. Having said that, a movement in bold yield reflects in bond prices. When bond yields increase, debt funds with a long term portfolio maturity react more swiftly than short-term funds. Debt mutual fund investors who do not wish to risk their finances may consider only investing in top-rated debt funds.

Generally, if the NAV of debt mutual funds witnesses a sharp fall this may attract new investors. Such investors generally invest for the long term as it may take some time for NAV to appreciate. The best way to take advantage of underperforming markets is to opt for a Systematic Investment Plan rather than making a lumpsum investment. Also, NAV should not be the only focal point of investment. In volatile markets, investors may also have to look at the credit quality of the debt assets that form the portfolio of the debt scheme in which they are planning on investing. An ideal way to choose a debt fund is to look for a scheme whose underlying securities comprise of high rated debt related instruments such as AAA or AA+ rated bonds and government backed securities.

Potential debt fund investors may also have to keep a close eye on the interest rate movement while strategizing their debt investments in the current year. Investors with a long term investment horizon may have to stick to debt schemes whose average portfolio maturity spans over five to seven years. On the other hand, investors with a short term investment horizon may stick to debt schemes like liquid funds and overnight funds which have a shorter portfolio maturity. Irrespective of which type of debt mutual fund you plan on investing in, the best way to ensure that you invest regularly is by opting for a Systematic Investment Plan.

Systematic Investment Plan or SIP as it is often referred to as is an easy and convenient way of saving and investing a fixed sum regularly in debt funds. Once investors are convinced that a particular debt scheme is suitable for their goals, they can later start a SIP in that particular scheme. One can also use the SIP calculator to determine the total returns (approximate) which their SIP investments in debt funds may fetch over a certain duration.

Debt as an asset class may possess less volatility, but it isn’t entirely a risk free asset class. Debt funds are prone to credit risk and interest rate risk. Debt schemes may invest in securities that generate fixed income, but that doesn’t oblige them to generate guaranteed returns. Hence, it is recommended that retail investors diversify their investment portfolios across asset classes to minimize investment risk. Also, first time investors should consult a financial advisor who might help them make an informed investment decision.

Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.