I have 42 years old. The average return on my corpus of debt funds is less than 5%. Should I switch to FD bank?

I am 42 years old and I have a debt fund of 6 lakh for my short term goals and emergency fund. While my equity portfolio has generated high returns over the past 2-3 years, the average return from my debt fund corpus over the past year is less than 5%. On the other hand, banks are steadily increasing their FD rates, with many offering interest rates in the range of 5.5-6% per annum. I don’t want to invest my corpus of debt funds in equity funds. Should I redeem my debt fund investment and switch to bank FDs?

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Rising inflation, improving credit demand and rising crude prices led to a sharp rise in benchmark bond yields and other market interest rates. This leads banks to regularly increase their FD rates. Rising interest rates have a negative impact on the returns generated by debt funds, especially those with longer maturity profiles. Thus, most debt funds, including those with shorter maturity profiles, have failed to beat FD yields over the past year.

Since the rising interest rate regime is likely to continue for some time, I will suggest that you shift your investment from debt funds to bank FDs yielding over 6% per annum for terms of 1 to 2 years. Some of the scheduled banks offering FD yields above 6% for 1-2 terms include SBM Bank, Utkarsh Bank, Suryoday Bank, Ujjivan Bank, Jana Bank and ESAF Bank. Continue to invest in the FDs of these banks for your short term financial goals as long as their interest rates continue to show an upward trend. As soon as the FD card rates of these banks begin to show a downward trend, you can invest your additional surplus or FD maturity proceeds in the direct plans of HDFC Short Term Fund and ICICI Prudential Short Term Fund. If you are comfortable with slightly higher risk, you can also invest some of your fixed income corpus in the direct plans of conservative hybrid funds like ICICI Prudential Regular Savings Fund and Kotak Debt Hybrid Fund. As these funds are required to invest 10-25% of their corpus in equities and equity-related instruments, this allows them to generate higher returns than fixed deposits and debt funds.

Question answered by Naveen Kukreja, CEO and Co-Founder, Paisabazaar.com.

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