Wednesday, February 22, 2023


For investing in debt, one can go the direct route, or through a Mutual Fund.

Direct route involves a lot of tracking, with the onus of choosing the right instruments to invest in. It is also tax inefficient, especially for those whose annual income exceeds ten lakhs.

Debt MF's come in several flavours.

They can vary based on:

Risk: lower return lower risk funds investing in only govt securities or AAA. 

MF's that promise higher return through investing in lower rated securities. In the Indian debt market the "excess" return is very low, not enough to cover the additional risk. Hence, it is better to stick to low risk options.

Duration: Funds which invest in higher duration securities carry an interest rate risk. This is not correlated to safety, and is an independent factor.

In a rising interest rate scenario, it is better to stick to low duration funds. This was the case in the last two or three years. However, interest rates have reached a high point now, and though one can't say whether they have peaked, it is reasonable to assume no substantial increase in rates in the near future.

Read "near future" as three to five years.

If one wants to mitigate interest rate risk entirely , it is good to  invest in Target Maturity Funds.

These are funds that have a Target Date in their name, and invest only in risk free securities maturing on that date. For example , a 2027 fund, invests in risk free securities maturing on June 30, 2027.

It makes sense to invest in such a fund provided the target date is at least three years away ( for reasons of tax efficiency) and provided you expect to hold to maturity. 

Currently, these are the TMP Funds available in the market: 

IDFC CrisilIBX  ---- choose depending on target date 

Edelweiss Nifty PSU Bond Plus SDL Index Fund - 2026

Nippon india nifty AAA CPSE Bond plus SDL - choose depending on target date

Worth considering in my view. For investing in debt in the current market scenario, they are good options.

Two links for aditional reading: 

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