Should You Invest In Long-Term Debt Funds?

Your plan to create long-term wealth might get hindered due to the volatile nature of the equity market. But, if you want to avoid the market instabilities of equities and are a risk-averse investor, consider parking your funds in long-term debt-oriented mutual fund schemes. Vardan Pandhare analyses the opportunities present in long-term debt funds in this special report

-  Vardan Pandhare

If you have been an active investor in recent months, you have most likely come across numerous headlines on popular finance portals proclaiming that long-term debt funds can deliver double-digit returns going ahead. While these articles do catch your attention, they often fail to address the fundamental question about whether you should invest in long-term debt funds. Most of the information available regarding long-term debt funds only mentions that a drop in interest rates leads to a decline in bond yields, thereby increasing bond prices.

Consequently, long-term debt funds, which primarily invest in long-term maturity government bonds and corporate bonds, stand to benefit the most from such rate cuts. However, they rarely delve deeper into the topic and hence we took upon us to clear the smoke screen. According to SEBI classification, any debt fund with an average maturity exceeding seven years can be classified as a long-term debt fund. These funds are typically benchmarked against the 10-year G-Sec yield or Government of India bonds. Presently, the yield of the 10-year G-Sec or bond stands at 7.011 per cent.

A Long-Term Investment Plan

Debt mutual funds are suitable for individuals seeking financial stability and consistent investment returns. These funds achieve this objective by allocating investments across a diversified portfolio of debt securities such as fixed income instruments, treasury bills, government securities, corporate bonds, money market instruments and other debt securities with varying time horizons. By investing in these funds, investors can expect to receive a steady stream of fixed income.