Why debt mutual funds are meant to stabilise portfolios, not create wealth

Lakshmi Iyer, Group President–Investments and Chief Executive Officer at Bajaj Alternative Investment Management, and Abhishek Bisen, Head of Fixed Income at Kotak Mahindra Asset Management Company, said debt mutual funds should primarily be used to bring stability to retail portfolios and to meet defined financial goals, rather than for wealth creation.

Debt funds as portfolio stabilisers

Bisen said debt funds play a clear role in managing volatility and generating predictable income. “Debt fund should be used as a portfolio stabiliser,” he said, adding that investors should align fund duration with their financial goals.

He explained that short-term goals should be matched with short-duration funds, while longer-term goals are better suited to longer-duration debt funds. This, he said, helps manage interim volatility and improves return predictability.

First-time investors should start with liquid funds

For new investors, Bisen suggested a gradual approach, starting with liquid funds before moving to other debt categories. He said traditional savers are accustomed to stable returns, while mutual funds are marked to market.

“Liquid funds are the least volatile,” he said, adding that investors can move to short-term or long-term debt funds once they are comfortable with fluctuations and have clarity on their investment horizon.

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Switching funds can hurt returns due to tax impact

Bisen cautioned against frequent switching between debt funds. He said moving in and out of funds can be tax-inefficient and may reduce overall returns.

“If you move out, you are liable to short-term capital gains tax,” he said, adding that investors should decide their objective early and stay invested for the fund’s duration to benefit from interest rate cycles.

Debt funds as safety nets, not wealth creators

Iyer said the primary purpose of debt mutual funds is capital protection and stability. “The basic intent is only from a safety net perspective and not really from a wealth creation perspective,” she said.

She added that the choice of debt funds depends on risk appetite and the time for which money can be allocated, especially for contingency planning and portfolio balance.

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Stay invested through interest rate cycles

On interest rate movements, Bisen said markets tend to price in rate changes well in advance, which can create short-term volatility in returns. He explained that returns may appear weaker during rate hikes and improve during rate-cut cycles, even before policy action takes place.

Iyer advised retail investors not to try timing interest rate cycles. “Switching in and out of funds is not a very great idea,” she said, adding that investors are better off selecting a suitable strategy and staying invested, particularly in shorter-duration categories that can ride multiple rate cycles.

For the full interview, watch the accompanying video

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