Debt fund NAV falling: What should investors do?

Why is Net Asset Value (NAV) of various Debt Funds nosediving these days? Will the trend continue if the stock market falls further? ASN Raju, Yanam

Arguably, the connection between the stock market and debt funds is inverse. The falling or rising stock market will not significantly impact the performance of debt funds. The concept of debt funds and their ambulation is different from equities. Equity markets get more investments when interest rates are low. Investors shift to debt funds in the falling equity market, bearish phase, and uncertain times to seek higher returns. Interest rates and inflation are often linked and frequently referenced in macroeconomics.

The interest rate is set to rise if inflation surges. Debt instruments and equities compete for investors' funds; hence they usually have an inverse relationship in value. Even though equities and debt funds have an inverse relationship but are both similarly affected by inflation and interest rates.

Debt funds invest in various securities. Low-rated securities are more volatile when compared to higher-rated securities. Debt funds invest in short-term securities during a rising interest rate period. Conversely, falling interest rate periods see more in long-term securities. Some corporate companies may default on bond interest payment due to poor economic conditions, leading to poor performance of debt funds. Inflation, gold prices, crude oil prices, government borrowing and interest rates have a direct relationship.

Especially, interest rates are dependent and can be adversely affected due to the volume of government borrowing, changing inflation, commodity, crude oil prices. One of the core reasons for the disappointing performance of debt funds is the Union Budget 2022. The budget proposal of massive borrowing through the issuance of government securities will have a huge impact on yields of bonds and securities. As a result, Debt funds begin to underperform. Hence, it would help if you had a balanced portfolio comprising equity and debt funds. Invest in debt funds only for short-term duration or goals during a volatile interest rate regime.

Is it the right time to invest in stock markets, especially in this uncertain phase and changing economic conditions? HC Nagaraj, Bangalore

Predicting markets and timing the market remains one of the most significant challenges. The timing of the stock market is crucial as it determines when to enter and when to exit. Or when to buy a particular stock and when to sell. There are many tools, rules, patterns, and charts that can predict future stock price movements. Despite this, there is no solid answer to timing the markets. The brightest minds in the market with decades of experience sometimes make the wrong judgement. However, investors and traders take cues from the past pricing history that can be used to influence their future investment decisions.

Timing matters and is essential for buying or selling a stock or index that has risen too sharply. It may increase further, or the market may be due for a correction. Invest in equity mutual fund schemes only if you have a risk appetite and long-term investment horizon, say between five to ten years. Otherwise, equity is not your cup of tea. You may take the mutual fund route if you still want to invest in equities and have a moderate risk appetite.

If you have cash, you may invest a lump sum, buy at dips or during a sharp correction in the market, provided you have a long term time horizon. The combination of fundamental and technical analysis is vital in stock market investments. If you are a conservative investor, you may opt for blue-chip stocks and large-cap stocks or mutual fund schemes. You may pick mid-cap stocks or Flexi cap mutual funds if you have higher risk tolerance. It would help if you also kept the future prospects of a particular company in mind. And do thorough research to determine whether the current market price justifies given the performance and financial health of a specific company.

Otherwise, subscribe to SIPs with a long term horizon. It is better to stick to regular FDs, fixed income schemes and traditional investment options if you do not have risk tolerance and a long-term horizon. Some investors fall prey to stock market tips through various social media portals. Most of these are operated illegally. The primary reason for investing in the stock market is to make profits, not lose the investment's value. Well-informed investors stay away from those trading tips. It is not easy to predict the right time to enter and exit stock markets. You may seek a local investment advisor's help for better understanding.

(The author is a SEBI licensed Research Analyst. The alumnus of the Indian Institute of Foreign Trade (IIFT), he had held leadership roles at National Geographic, Reliance Radio Television Luxembourg, STAR TV, etc)