Debt Funds: Invest or not to invest
The famous quote by Mark Twain-“History doesn’t repeat itself but it often rhymes”, fits aptly into the investment world. The historical returns may not repeat itself however, it does provide valuable lessons for investing in the future. There are supporters of investment in shares that will present different statistics where stocks have outperformed various other asset classes in the long-run. Nevertheless, in the short run, debt funds have generated returns equivalent to stocks and there are some cases where they even have exceeded their returns.
| Returns of Different Categories of MF For Various Periods (%) |
| Category | 1 Week | 1 Month | 3 Months | 1 Year | 3 Years | 5 Years | 10 Years |
| Multi-Cap | -0.39 | 1.06 | 3.31 | 14.93 | 10.40 | 7.68 | 11.66 |
| Long Duration | -0.23 | 0.20 | 2.00 | 13.42 | 7.36 | 8.28 | 8.05 |
| Medium to Long Duration | 0.07 | 0.20 | 1.18 | 8.02 | 4.99 | 6.42 | 7.44 |
| Medium Duration | 0.15 | 0.42 | 1.03 | 4.34 | 5.37 | 6.51 | 7.45 |
| Short Duration | 0.18 | 0.58 | 1.46 | 4.77 | 5.36 | 6.51 | 7.55 |
| Low Duration | 0.13 | 0.39 | 1.13 | 2.00 | 5.13 | 6.22 | 7.20 |
| Ultra Short Duration | 0.11 | 0.35 | 1.27 | 6.54 | 6.18 | 7.00 | 7.96 |
Moreover, it has been observed that during the economic downturn, bonds with longer duration generally provide better return than stocks. We have seen this in the last one year, when the economy was going through a rough phase, long-term bonds were performing better than various other categories of stocks. However, in a case where both interest rates and inflation are rising, short-term bonds (treasury bills and money market equivalents) often outperform both long-term bonds and stocks. In the year 2020, we may see a similar case.
Why should you invest in debt funds?
The cardinal principal of investment is to minimise risk of loss and one of the the best ways to do so is to invest in different asset classes. Only point that is needed to be kept in mind is that the returns of these assets should not be highly correlated. This means, one should invest in assets whose returns do not rise and fall together, as when one asset class declines in value, another asset class increases, which minimises portfolio losses and seek overall positive returns.
Last year, when stock market on an average was not doing well, some category of debt funds generated super returns. Keeping them in your portfolio will help you to have a better investment experience in the long-run.