Invest in dynamic bond funds to manage the impact of the interest rate cycle

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When investing, it is always advisable to invest in a combination of stocks, debt securities, gold and other instruments, depending on your financial objectives, investment time horizon and risk tolerance. risk. For debt allocation purposes, investors have a variety of mutual fund offerings to choose from. However, the one aspect investors should always look for in any leveraged investment is liquidity, security, and then returns. Getting this right is of paramount importance.

Understanding Debt Fund

Typically, debt mutual funds invest in securities that yield fixed interest such as corporate bonds, government securities, treasury bills, commercial paper, and other money market instruments. Investments in fixed income securities with fixed maturities and fixed interest rates generally tend to be insulated from market volatility. Therefore, investing in such securities with equity mutual funds ensures that a balance between risk and return in the portfolio is maintained at all times.

Compared to traditional investment options, mutual funds offer a double advantage: easy liquidity and tax efficiency. Unlike traditional investment options, there is no lock-in in a mutual fund. Here, investors have the opportunity to redeem their investments where they are never needed. In terms of taxation, if a debt investment is held for more than three years, then the long-term capital gains tax is 20% with an indexation benefit. If the holding period is less than three years, the applicable tax is that of the individual’s tax bracket.

Options available

Given the different options available among debt funds, it is only natural for an investor to wonder which of these funds would be suitable for him in the long term. In such a scenario, if an investor is willing to stay invested for the long term, they may consider investing in an aggressive bond fund. As the name suggests, in this fund, the fund manager has the option to invest in corporate bonds, government securities and can invest in multiple maturities, which is very beneficial. This is important because the fund manager here has the ability to shape the portfolio based on changing interest rate scenarios.

Given concerns about economic growth and inflation around the world, there is a cloud of uncertainty about the pace of rate hikes that global central banks may undertake. Moreover, it remains to be seen how economies will react to these developments. Indeed, there is a good deal of uncertainty about the evolution of interest rates. Investing in such a situation calls for caution. However, it is very difficult for a layman to follow all these developments and react accordingly. In such a scenario, overly buoyant bonds emerge as a suitable investment option to overcome short-term uncertainty and any interest rate volatility.

Explore Dynamic Bond Fund

There are several offers from different fund companies in this category. So, while making a selection, pay attention to the track record of the fund in which you want to invest. Check how the fund has weathered different interest rate cycles, the processes the fund followed to make investments, and the overall consistency of performance in different market phases.

To conclude, if you are an investor who is unsure of the practicalities of debt investing but wants to invest with a long-term horizon, a dynamic bond can be very useful.

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