As bond yields rise what should be the next move of debt fund investors?

Interest rates appear to be steadily climbing since July 2020, causing debt portfolios to become red. Continue reading to learn about the debt funds to consider in the future.

If you look back to 2018, interest rates began to decline and continued to fall until July 2020. This was a profitable era for most debt funds, particularly long duration and gilt funds, which delivered double-digit returns of 17 per cent and 14 per cent, respectively. Bond prices rise in a declining interest-rate environment, helps debt funds gain returns and vice versa.  

As a result of the lowering interest rate environment, the debt fund received returns over the aforementioned time. However, when interest rates begin to increase as a result of the central bank sucking excess liquidity, bond yields begin to climb, which is bad news for debt funds, particularly those at the top end of the yield curve.  

As you can see, the table has flipped around in the second section from July 2020 to date, and this time categories such as credit risk, low duration, medium duration, and short duration are performing well. Furthermore, the Reserve Bank of India (RBI) is expected to raise key policy rates in the near future, causing bond yields to climb.  

As a result, investors should maintain a well-balanced debt portfolio by investing in short-term funds, corporate bond funds, low-term funds, and floater funds.