Rising inflation? Know which debt fund category will suit you more

Mutual funds have become a primary investment tool for a lot of people lately. These are a pool of professionally managed funds that invest across equity, debt, gold, and other asset classes as well as in various money market instruments, sectors, and industries. Not all mutual funds invest in equity, some invest in other types of investment avenues as well. Mutual funds are also known to help investors overcome inflation as well. However, not all individuals are comfortable with investing their money in equity mutual funds as they are afraid that they might lose their money to market volatility. Such individuals can still beat inflation through investments in debt funds.

What are debt funds?

You may be aware of equity mutual funds, but very few are aware of debt mutual funds. While equity mutual funds allocate the majority of their assets to company stocks, debt funds are mutual funds that aim to generate returns by investing in fixed income securities and other debt instruments like bonds. There are around 16 categories under the debt fund umbrella and are regulated by the Securities and Exchange Board of India (SEBI). Debt funds predominantly invest in debentures, PSU bonds, CBLO, treasury bills, commercial papers, etc. Depending on the different nature of debt schemes and their investment objective, their underlying securities may change.

Which debt funds are ideal for beating inflation?

Inflation is on the rise and is something that cannot be ignored. To explain it in simple terms, a half-liter of packaged mineral water that costs Rs. 10 today, cost Rs. 5 a decade ago. And shortly, the same mineral water may cost Rs. 20. This only explains that the rupee is losing its purchase power year after year. The savings that you currently have may not have the same value 10 years from now. Hence, it is important to invest in schemes that can deliver inflation-beating returns in the long term.

Debt funds are generally considered by investors for achieving their life’s short term goals or for building an emergency. That’s because there is a common notion among investors that debt funds are only good for tackling short term financial problems. However, what they do not know is that under debt funds there are multiple investment products which they can consider for long-term goals too. Since most investors rely on equity funds for long term goals, they tend to ignore debt options available for long term investing.

Investors, to beat inflation can consider investing in medium duration debt funds or long duration debt funds. A medium duration debt fund is an open ended scheme whose underlying securities form a portfolio such that its Macaulay duration is 5 to 7 years. A long-duration fund is a debt scheme whose underlying securities form a portfolio such that the Macaulay duration is between 7 to 10 years. Such schemes are specially designed to deliver returns over the long term as they invest in debt instruments that have a long maturity period.

 

How to invest in debt funds for the long run?

To allow your debt funds to deliver inflation-beating returns, investors may have to remain committed to their investment for the long run. For this, they should consider starting a SIP in debt funds. A Systematic Investment Plan allows retail investors to save and invest a fixed sum at regular intervals. Investors who don’t know how much money to invest to achieve their goals can refer to the SIP calculator, a free online tool. SIP ensures that you save and invest regularly, thus inculcating the discipline of regular investing.