Why Should You Invest In Debt Funds When Equity Is Soaring?

With the equity markets rising, you may wonder if it makes sense to consider debt funds at all. But you should always remember that a prudent investment portfolio needs to have a balance between equity and debt.

With the equity component of any portfolio soaring now, it is an opportune time to look at your asset allocation and rebalance if required. A simple way to do this is to book profits from equity instruments and invest the same in debt to maintain the original asset allocation. But you could do this in a planned manner since the prospects of investing in debt are looking up.

With the possibility of interest rate cuts imminent, taking a medium- to long-term bet on debt schemes is a smart move, which is likely to pay off handsomely in the future. For instance, the yield on a 10year government bond is 7.096 per cent now (see Softening Bond Yields) and has been falling steadily over the past six months—from 7.432 per cent in October 2023 to the current levels—and the prices are becoming more attractive. This might give a fillip to debt mutual funds. For investors, this situation augurs well because bond yields and interest rates are positively correlated, with both moving in the same direction.

The economic indicators are pointing towards a rate cut in the future, which could lead to an increase in bond prices. Debt investors, especially those investing into medium- to long-term funds, are likely to get the benefit of declining interest rate in the form of capital appreciation on their bond portfolios coupled with coupon income.