As an investor, you often think short-term while investing in debt schemes and never think of reinvestment risk. But have you ever thought that even debt in the long term would meet your investment goal? If yes, then how long?
Debt as a long-term investment:
Investors should look at their investments in equity and debt as multi-generational assets. By looking at debt as a long-term investment, you can reduce the reinvestment risk- (reinvestment risk is the chance that an investor won’t be able to reinvest cash flows from an investment at better rates).
So, when should you invest in debt? Is this the right time to invest?
Well, the market doesn’t tell you the right time to invest. It provides you with various opportunities in which you need to decide whether you should invest or not. Given the current market conditions and rising inflation, interest rates, and yield rates, one can say that it’s a golden opportunity to capture higher yields by investing in debt securities.
Now let’s understand what the market condition is: Understanding Inverse Relationships or Investing at the Peak of Interest Rates
Bond prices and interest rates have an inverse relationship. What it means is that bond prices will move up if there is any indication of interest rates coming down in the near future.
Currently, interest rates are at their peak. If you recall, over the last 3 years, ever since COVID was declared, most central banks, including the RBI, have started reducing interest rates. Post covid, the rates have gone up gradually. This also pushed the inflation rate higher. Most investors anticipate interest rates not moving up further, at least in India.
This is a perfect time to lock in your investment in a debt fund. But which debt fund category to choose is the next question.
Our research and analysis show that the medium-term bond fund is the ideal place to invest for a 2-3 year time frame.
One might be wondering why interest rates should again start going down.
The government and the central banks always aim to moderate interest rates to have a balanced and stable economy. Higher interest rates or very low-interest rates are not good for any economy.
It’s difficult to predict what the RBI governor thinks, but we think we are at the peak of rates. One can invest in these medium-term debt funds and gain better returns over the next few years.
Here are our top picks so you can lock in this opportunity.
- HSBC Medium Duration Fund
- HDFC Medium Term Bond Fund
I have already invested in fixed deposits in my bank account. Should I consider these debt funds too?
As a form of diversification, you can invest in these funds, which merit better risk-adjusted returns. Taxation occurs only when you sell your debt funds. There is no yearly TDS at the financial year-end.
Investing at the peak of interest rates can definitely have the advantages of higher yields and discounted bond prices. Let’s not forget that diversification across asset classes is one successful mantra for investment success.