Short duration or long duration debt funds : Where to invest?

Short duration or long duration debt funds : Where to invest?

Investors do not advance in debt mutual funds with an expectation of double-digit returns. Debt is usually attached to the investment portfolio to balance the high-risk inequities in the case. Thus, most of the time, it is recommended to stay in the shorter end of the yield curve, where the volatility is more inferior. But the high returns in the average and longer end of the yield curve has put investors in rage. Long duration debt funds on average have produced 12% returns in the last one year, Medium to long-duration projects have given close to 10% returns and short duration debt funds have produced 8.80% returns in the last one year.

Given the handsome returns across debt funds and the risk concerned, is it wise to invest in long-duration funds immediately? What is the risk associated? Read on to know where to invest the debt portion of your portfolio and how?.

Mutual fund managers understand the sharp reduction in interest rates has cheered the long duration supplies. They believe investors who have around five years of the horizon and can exhibit the volatility during that term, can go for long-duration funds to enjoy higher profits.

"There has been a structural downtrend in interest rates over the last 15-20 years. This has helped great duration funds perform well. As long as the investors have an expense horizon of at least 4-5 years, and they are pleased with the interim price and NAV volatility, long duration funds should be part of the core debt allocation in any investor’s portfolios.

The Reserve Bank of India has formed the benchmark repo rate by 115 basis points since the Covid crisis started, bringing it down to record lows of 4%. Mutual fund managers expect lower profits from the shorter duration funds going forward. They say, investors need to be sensitized towards moderate return expectations from these outcomes going forward.

"The amount of excess liquidity in the banking system has assured that shorter end bonds and money market securities have witnessed a substantial lessening in yields as well as spread tightening. Given this context, even as the monetary policy cycle is expected to rest easy with policy rates staying low for a bit longer, return expectations from all shorter duration debt products require to recalibrated downwards.

However, the short-term fund is anticipated to outperform the bank fixed deposits on a pre or post-tax basis.

Mutual fund advisors require investors to choose a debt fund basis for their investment horizon.