There is an inverse relationship between interest rates and bond prices. Whenever there is a fall in interest rates, bond prices go up. Over the years, the interest rates offered by conventional schemes like bank FDs has gone down as low as 5%. With such low interest rates, investors are now looking for other investment options. Debt funds are a preferable investment choice as they offer returns better than FDs with minimal investment risk. Nowadays more and more people are switching to debt funds because they have the potential to offer decent returns without taking any added risk.
Debt funds are open ended schemes which invest in bonds, debentures, treasury bills, and other money market instruments to achieve a common investment objective. There are around 15 product categories under debt schemes which makes to possible for almost every type of investor to attend to their investment goals.
Which debt funds give double digit returns?
Long duration funds and gilt funds have given a record returns of 12% and 10.76% in the past. These two funds have offered returns more than any other debt product category. Apart from the fact that they have outperformed all other debt fund products, these two have even managed to deliver returns better than most equity funds.
What is a long duration fund?
A long duration fund is an open ended debt scheme which invests in debt and debt related instruments such that the Macaulay duration of the scheme portfolio is anywhere between 7 to 10 years. The average maturity of the portfolio of a long duration fund is anywhere between 7 to 10 years. Since these funds generate returns over the long term, long duration funds are prone to interest rate risk. These funds are ideal for investors with a long term investment horizon who are looking for an investment scheme less volatile than equity funds.
What is a gilt fund?
Gilt funds are debt schemes which predominantly invest in government securities and government bonds. These debt funds aim at generating capital appreciation by investing in government bonds which are considered to be the safest investment option in India. However, gilt funds are only known to offer returns over the long term, and this is why investors looking for a debt fund for short term investment should reconsider investing in a gilt funds.
Features of a long duration fund
These funds benefit when interest rates are falling. The constant fall in interest rates over the last few years has given long duration funds much more exposure. People have now started to realize the importance of long duration funds as they have offered returns even better than most equity schemes over the long run. Looking at how the interest rates have been falling, long duration funds can be a sensible investment option for those looking to create some wealth over the long term.
Features of gilt funds
Since these funds invest majority of its corpus in government backed securities, gilt funds have almost zero credit risk. This is much safer than debt funds that invest in corporate bonds. Companies may or may not repay but government usually pays off the said interest which makes gilt funds a safe investment option. No other mutual fund can offer capital protection like gilt funds as they carry minimal investment risk. Also, these funds invest in securities which a retail investor may not be able to directly invest in. Retail investors do not have direct access to a lot of government securities which they can invest through gilt funds.
Although debt funds are less risky than equity schemes, they aren’t entirely risk free.