Open market operations (OMO) are the short-term or temporary measures of influencing interest rates and liquidity in the system. Suppose there is excess short-term liquidity in the system, the RBI will sell Government securities in the debt markets to absorb the liquidity. While if there is a deficiency, RBI will buy Government securities from the markets.
What does it mean for the average return on your debt mutual fund investments?
A debt mutual fund mainly invests in bonds issued by corporates and the Central & State Government. RBI may increase rates to curb inflation. This action controls consumption and reduces the demand for goods. When RBI reduces the benchmark rates, it will generally cause a fall in interest rates. So, the prices of existing bonds, issued at a higher coupon rate increase, as the new papers will be issued at the current lower interest rates. There is an inverse relationship between bond prices and interest rates. If the bond prices go up, the এনএভি of your debt fund may also increase. This is even more pronounced in the case of long-duration funds as the longer the tenure, the more sensitive is the bond price to movement in interest rates. This means the extent of capital appreciation may be more in longer-dated bonds. Sensitivity of NAV to interest rate changes is determined by its Modified duration.
However, always stay true to the investment's purpose and the reason for investing in debt in your portfolio. Avoid being swayed by a policy announcement to make drastic changes to your portfolio. You can continue to stay invested and reap the benefits of debt funds in the form of short-term debt funds, corporate bond funds for your short to medium needs, and gilt funds, or long-duration corporate bond funds for your long-term needs. The suitable debt fund to invest in is the one that align with your investment horizon and risk appetite.
Want to know more about the types of debt funds?
