How to plan a correct Debt Investment Strategy • RoboAdviso | Best Blog for Mutual Fund and Investment in India

How to plan a correct Debt Investment Strategy

Roboadviso     Asset Allocation,Financial Planning,Mutual Funds     Posted On, Mon 27th June, 2016     1 comment

How to plan a correct Debt Investment Strategy

Debt Mutual Fund

When the central bank or the Reserve Bank of India (RBI) holds on to the policy rates, it paints a picture of confusion in the mind of debt mutual fund investors. A rate cut by the RBI spells good news for debt mutual funds. But when the RBI hints at hiking rates, it may put a dent in the investor’s debt strategy. So, what should one’s debt investment strategy be?

The retail investor should not really worry about the RBI’s policy reviews. He or she shouldn’t just concentrate only on interest rate movements and choose their debt investments. The policy review happens every quarter. Investors would do better if they focus on their own financial goals, their risk appetite and invest their money accordingly. Do not invest in a fund or a particular scheme with the frame of mind that you are going to benefit from the rates going up or down. Focus on your financial goals, in the short-term and long basis.

It is more important to understand how a debt fund works and what it is suited for, before investing in one. Simply said, a debt fund is an investment tool that delivers regular, consistent rate with low to medium risks. The emphasis is on capital protection, decently high returns and tax efficiency. You make money in a debt fund, when the interest rates fall, because the price of debt securities and rates move in an inverse proportion. Debt funds also make money through investments in corporate debt instruments that yield income in the form of interest. In a rising interest scenario, investors should choose funds with lower maturity period and vice-versa.

So invest in a combination of short-term and long-debt fund with at least 75 percent of the portfolio in short-term and the remaining 25 percent in long-term debt funds to benefit from possible fall in yields in the near future. As mentioned before, your decision about a debt mutual fund depends on your own goal. If you have a long-term goal, do not invest in a short-term fund.

For a short-term, invest in a liquid fund or an ultra-short term fund. These funds are used to park your surplus funds for a short period of time and are not as volatile as other debt funds. Invest in liquid funds if you want to keep your money invested anywhere from 1 day to 6 months and invest in ultra short term funds, if you wish to keep your money invested anywhere between 6 months to 1 year. If you have an investment perspective of anywhere between one and three years, go for short-term funds. Remember debt funds carry risk too; the higher the maturity period of a debt fund, higher is the interest risk. For goals that are 5 to 10 years away, invest in equities.

Consult your financial planner on how you would like to diversify your investment across various asset classes and in what proportion. Depending your risk appetite and your goals, you can create a well-targeted financial plan and a sound investment strategy.

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