That being said, short-term debt funds performed well despite the liquidity issues and heightened credit risk in the market in 2020.When you invest to achieve your financial goals, you must select the right types of investment products that belong to the asset classes best suited for you. While equity investment is meant for investors who are ready to take medium to high risk and are looking for a high return, debt investments can allow stability along with a decent return with low to medium levels of risk depending on the product.

Debt mutual funds offer several options to invest in the debt asset class. You can choose the appropriate debt fund scheme as per your investment horizon, risk appetite, and return expectation. So, to decide your debt investment strategy for 2021, you must first use your learnings from 2020.

Learnings from 2020
In 2020, people had expected huge volatility in the equity mutual funds due to the outbreak of the Covid-19 pandemic while assuming debt funds would remain immune. However, debt funds came under huge liquidity pressure, and some of the fund houses went into side pocketing (a technique exercised by fund houses to protect investor interests who have exposure to risky assets by segregating illiquid or bad quality assets from liquid or good quality assets in a debt portfolio). That being said, short-term debt funds performed well despite the liquidity issues and heightened credit risk in the market in 2020.

What to expect in 2021?
Liquidity is not expected to be an issue anymore for the debt funds in 2021. However, global bond yields have recently shown a big upside move. There are also chances of a surge in inflation in the coming months and throughout 2021. In India, the interest rate may not be hiked immediately as inflation is hovering around 4%. However, with a consistent rise in crude price, inflation may shoot up in the coming months. In India, the bond yield may also increase in the near future or probably during the second half of 2021. You must be wondering what’s the relationship between the bond yield and debt funds. Well, when the bond yield increases, the debt fund value falls and vice-versa. So, the NAV of your debt fund will decrease when the bond yield increases.

Debt fund investment strategy
Investors should focus on goal-based investment in debt funds. If you invest for a short-term goal, then stick to short-term funds, and if you want to invest for long-term goals, invest in long-term funds. However, when there is an increase in the bond yields, long-term funds usually react more sharply than short-term funds. If you don’t want to face volatility risk, investing in top-rated debt funds is the right choice.

A fall in the debt fund NAV can also bring in an opportunity for new investors to invest money for the long-term. In the current situation, when the debt fund NAVs may go down, it’s better to focus on a staggered investment plan than invest lump-sum. In a volatile debt market, it’s always advisable to check the quality of the fund’s assets in which you invest money. You should ideally prefer a debt fund that consists of high-quality debt instruments such as AAA or at least AA+ rated bonds and government securities.

In 2021, debt fund investors must keep a close watch on the interest rate trend and take the investment decision accordingly. Long-term investors should prefer staggered investing, whereas short-term investors should stick to liquid funds as the debt market is expected to be volatile in the near future.

Lastly, you must invest in a diversified manner across various asset classes in line with your risk appetite and return expectations to keep the overall investment risk under control and bag desired returns in time. When in doubt, don’t hesitate to consult a certified investment advisor.

LOOKING AHEAD
Liquidity is not expected to be an issue anymore for debt funds in 2021
There are also chances of a surge in inflation in the coming months and throughout 2021
Go for a debt fund that has high-quality debt instruments such as AAA or at least AA+ rated bonds and G-secs
Invest across various asset classes in line with your risk appetite and return expectations to keep overall investment risk under control

https://www.financialexpress.com/money/smart-investing-what-is-your-debt-fund-investment-strategy/2205045/