Debt mutual funds returns fluctuate despite investing in fixed income securities: Here’s why He assumes debt funds offer fixed returns. However, his relationship manager has clarified that debt fund returns fluctuate due to market risks, much like equity funds. Perplexed, Gupta wonders why debt funds, which invest in fixed-income securities like government and corporate bonds, with fixed interest payments, dont guarantee fixed returns
The key to understanding debt fund returns lies in their management and the nature of their instruments. Unlike fixed deposits, debt funds’ returns depend on NAV fluctuations—rising when the NAV increases and falling when it declines. Kunal Gupta may be surprised to learn that debt instruments in a fund are traded, giving them market-driven prices. Bond prices fluctuate with interest rate changes—when the RBI lowers rates, new bonds offer lower interest, making existing bonds with higher rates more valuable, thus increasing the NAV of debt funds. Conversely, rising interest rates cause bond prices to fall, pulling NAVs down. Additionally, fund managers may sell bonds at a profit when prices rise, further boosting NAV and returns. Just as equity mutual funds depend on share price movements, debt funds’ returns are partly tied to bond price fluctuations. This process of adjusting NAVs to market prices is called ‘marking to market’ in financial terms.#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;}
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The return will depend on market price changes and varies with the type of securities held in the fund. A debt fund holds a number of instruments depending on its type. Shorter duration instruments will witness a lower impact of interest rate changes than longer duration ones. Hence, long-term debt funds, such as income and gilt funds, may be subject to slightly higher level of fluctuation in market prices than the short-term funds.
Debt fund returns come from two sources: interest income and gains (or losses) from price fluctuations. The interest component provides stability, making debt funds less volatile than equity funds, even though their returns cannot be predicted or fixed. Since debt funds invest in fixed-income instruments, they don’t experience the sharp swings seen in equities. Unpredictability isn’t a risk to fear as long as Gupta understands its source. He can invest confidently by choosing a fund that is aligned with his risk profile.
Content courtesy Centre for Investment Educationand Learning (CIEL).
Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.
#sr_widget.onDemand p, #stock_pro.onDemand p{font-size: 14px;line-height: 1.28;} .onDemand .live_stock{left:17px;padding:1px 3px 1px 5px;font-size:12px;font-weight:600;line-height:18px;top:9px} #sr_widget.onDemand .sr_desc{margin:0 auto 0;} #sr_widget.onDemand .sr_desc{color: #024d99;margin-top:10px;} #sr_widget.onDemand .crypto .live_stock .lb-icon{8px 6px 5px 3px !important} #sr_widget.crypto.onDemand a.text{border-bottom:1px solid #ccc;padding-bottom:5px;display:block;width:100%} #sr_widget.onDemand .sr_desc .text p, #stock_pro.onDemand .sr_desc .text p{font-size:12px;font-weight:400;} (Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
This story originally appeared on: India Times - Author:Faqs of Insurances
