Data as of June 08, 2022
(Source: RBI Monetary Policy Statements)  <\/p>\n\n\n\n

While the cut in excise duty and VAT on fuel prices announced by the government will ease price pressures to an extent in the coming months, RBI expects inflation to remain elevated till the end of the current calendar year. Accordingly, economists expect RBI to continue to announce further hikes in the repo rate of about 50-60 bps in the current calendar year.<\/p>\n\n\n\n

The impact of inflationary pressure is reflected in bond yields. India’s 10-year benchmark bond yield crossed 7.50% after RBI announced an interest rate hike in June, though it has softened a bit since then. The yields can rise higher as central banks announce further rate hikes.<\/p>\n\n\n\n

Moreover, factors such as increased government borrowings, higher debt-to-GDP ratio, weak rupee, and overall economic uncertainty could push the benchmark bond yield further. So far this year it has climbed over 100 bps, the fastest pace since the year 2008.<\/p>\n\n\n\n

Graph 2: The 10-year benchmark yield has hardened<\/em><\/strong><\/p>\n\n\n\n

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Data as of June 27, 2022
(Source: Investing.com, PersonalFN Research) \u00a0<\/p>\n\n\n\n

With yields hardening, the interest rates on fixed income instruments also have moved up. In this situation, it is a good idea to revisit your asset allocation and optimise your exposure to debt funds.<\/p>\n\n\n\n

Remember that debt funds are not risk-free. There are various risks associated with debt fund investment, such as interest rate risk, credit risk, and re-investment risk.<\/p>\n\n\n\n

As you may know, interest rates and bond prices are inversely related. A surge in yield impacts bond prices negatively. As a result, the net asset value (NAV) of debt mutual funds, especially long duration funds, also declines.<\/p>\n\n\n\n

When interest rates rise, funds focusing on longer duration instruments that have an average maturity typically in a range of 5 to 10 years are highly vulnerable to interest rate risk. These funds could witness high volatility in the near term. On the other hand, debt mutual funds that invest in short-term securities gain in a rising interest rate environment as they witness minimal mark-to-market impact.<\/p>\n\n\n\n

Therefore, you will be better off deploying your hard-earned money in shorter duration debt mutual funds.<\/p>\n\n\n\n

Given the current circumstances, it would be prudent to avoid selecting the ‘best debt mutual funds’ based on their past performance. The sub-categories and schemes that performed well in the past not necessarily will do well in the future. Instead, pay attention to your risk profile and time horizon when investing in debt funds.<\/p>\n\n\n\n

If you are an investor with a low-risk appetite (conservative investors) and your time horizon is less than a year, opt for short term debt funds such as Liquid Funds<\/a>.<\/p>\n\n\n\n

On the other hand, if you are a moderate risk taker and have an investment horizon of 2 to 3 years, you may consider Banking & PSU Debt Funds with a maturity of up to 3 years. You can also consider adding safely managed Corporate Bond Funds that hold exposure to top-rated debt instruments, provided you do not mind taking slightly higher risk.<\/p>\n\n\n\n

Also, as far as possible, invest in funds following an accrual strategy, i.e. holding the underlying debt instruments until maturity rather than engaging in yield hunting and taking a high risk.<\/p>\n\n\n\n

To make your job simpler, we at PersonalFN have identified some of the best-performing schemes in the aforementioned sub-categories of debt mutual funds.<\/p>\n\n\n\n

Table 2: Top 5 best debt mutual funds to invest in 2022<\/em><\/strong><\/p>\n\n\n\n