Here is the mutual fund strategy that investors should consider amid falling returns from debt funds.
Look For Short-term Debt Funds
As the name suggests, short-term debt funds invest in short-term papers, and upon their maturity, capital is reinvested in better yielding papers. Investing in short maturity funds helps in minimising the losses due to yield rise and offers benefits of reinvestment at higher yields.
Funds With Accrual Strategies
Invest in Target Maturity Funds (TMFs)
Target maturity funds follow an accrual strategy. These are primarily passive debt funds which track an underlying bond index. Such funds aim to help investors navigate the risks associated with debt funds by aligning their portfolios with the fund’s maturity date. Since they track the bond index, such funds tend to have portfolios comprising securities which are part of the underlying bond index, and thus have maturities in line with the fund’s stated maturity.
TMFs are mandated to invest in government securities, state development loans or SDLs and PSU bonds. The fund’s portfolios hold all these bonds or securities to maturity. This ensures that the fund’s duration keeps reducing with every year. Thus investments are less prone to price fluctuations caused by interest rate changes, thereby adding predictability of returns. Risk-averse investors may consider TMFs in their portfolios.
Debt-oriented Balanced Funds
Balanced funds that invest dominantly in debt can also be opted by risk-averse investors to increase their investment yields. About 65-70% of the portfolio of such funds is invested in debt instruments, while the rest is in stock-related instruments. Having a balanced investment strategy does help when there are uncertainties around the various asset classes.
Balanced Advantage Fund
These are dynamic asset allocation funds which offer investors benefits of both debts as well as equity investments. Given the changing valuations, such funds can take the equity exposure to as high as 80% and reduce it to a low of 20%, while the rest of the investments is made in various debt securities. Since such funds work on buying low and selling high, investors benefit from the continuous asset allocation strategy. Though the returns may not be as high as in the case of pure equity funds, the generated yield will comfortably beat inflation in the medium to the long-term investment horizon.
Investors can choose from a plethora of debt fund categories according to their risk-taking capacity and financial goals and create wealth through debt funds in the various cycles of interest rates. However, there are certain equity-related dynamic asset allocation funds which moderately conservative investors may also choose as a strategy in the current scenario.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.timesnownews.com.)