Should You Move Your Money To Debt Funds?

In October 2021, NIFTY reached an all-time high at 18,640 points. The stock market was buoyant. Easy monetary policies, low-interest rates, and FPI drove the global stock market to new heights. Some mutual funds, like SBI Small Cap and Union Small Cap, generated 100 percent returns. The market was overvalued, and it was easy to overestimate the market. But the current situation is quite the opposite.

What should be your investment strategy when the market is highly volatile and NIFTY has fallen nearly 15%? Should you shift all your investment to debt funds? In a poll by Angel One, where we asked investors whether they want to invest in debt funds or equities when there is a bloodbath in the market, 59% responded in favour of debt funds. However, this isn’t an entirely right approach.

What are debt funds?

Debt funds are mutual funds where the asset manager invests the funds in various debt instruments. The debt funds include investing in government and corporate bonds.

Corporations issue debt instruments to borrow funds from the market. Investing in debt funds is  therefore synonymous to lending. The fundamental reason to invest in debt funds is to earn steady earnings. The issuers offer returns on a pre-decided fixed interest rate. Hence,  debt instruments are also called fixed income securities.

Right time to invest in the debt funds

Shift your profit to a debt fund: Instead of moving your fund when your portfolio is incurring losses, the right time to invest in debt funds is when the stock market is recording new highs. You may lock your profit by moving the funds to secure, low-risk debt funds.

Rising interest rate: A second situation is when the interest rate is rising. It is often the case when there is a bloodbath in the stock market since the two move inversely, meaning when the interest rate increases, the equity market falls.

It indicates the current situation. The market is undergoing a steep correction, and NIFTY has lost significant value. Governments are trying to control rising inflation by tightening the monetary policies, one of which is to increase the bank interest rate. In the current scenario, FD interest rates have risen, and you may want to shift some of your investment to debt funds.

Short-term goals: Ideally, you should invest in debt mutual funds when you have a short-term investment goal and avoid too much volatility. To meet short-term capital requirements, you can consider liquid, ultra-short, low duration, and money market funds. These funds come in the span of six months to one year. 

Debt funds generate low-risk returns and may be suitable for specific investor groups. There are different kinds of debt mutual funds available for investing.

Dynamic bond funds: As the name suggests, the fund manager keeps moving the funds as the fluctuating interest rate regime changes.

Income funds: The fund manager will invest in funds with extended maturity, which makes income funds more stable than dynamic funds.

Ultra short-term funds: These funds come with a tenure of one to three years. With a short-term investment goal, ultra short-term funds ensure steady returns and high liquidity.

Conclusion

Historically, the equity market always bounces back after a deep correction, recording new heights. It happened on March 23, 2020, when NIFTY hit 7,610 points after COVID was reported in India. However, in two months, NIFTY recovered to 10,000 points and within a year doubled itself to reach the 14000 mark. So, think again if you are considering moving your capital to a debt fund! You should invest more in equities when the market is falling and volatile. Debt mutual funds may lower your risks but also decrease your portfolio’s earning potential. You should invest in debt funds or FDs when investing in the short-term or when you’re a retired person who depends on the income from investment. 

Disclaimer – This blog is exclusively for educational purposes. The securities quoted are exemplary and are not recommendatory.