If you are a conservative investor who relies on bank fixed deposits for regular income, it is better to lock-in money in FDs now, as the rates will fall further. Also, senior citizens who invest in senior citizen small savings schemes - because they offer higher interest than FDs - should lock-in their money before the interest rates are revised (decreased).
However, experts believe that the younger generation, which has the ability to take some risk for better tax-efficient returns, should consider debt funds. "Existing investors in debt mutual funds should continue to hold their investment. Also, those who have idle cash in bank accounts should look at debt funds as one of the investment alternatives to deposits. In a falling or stable interest rate scenario, debt mutual funds create a better experience, given the fact that it creates capital gain as the interest falls," says Balasubramanian of Birla Sun Life Mutual Fund.
"We expect 25 bps rate-cut in December and 25-50 bps next year. In this backdrop, we believe investors may find debt mutual funds to be an attractive investment option as compared to traditional savings products," Sharma adds.
How to Go About It
The investment environment is perfect for debt funds. Debt funds that invest in government securities are expected to benefit the most in the falling interest rate scenario. However, these funds are most volatile in nature - the decline is as sharp as the rise in case of change in interest rate. Therefore, knowing when to exit is very important when it comes to these funds.
"Given the fact that debt mutual fund offers products that take different types of interest rate and credit risk, the investor should choose funds in a manner that it ties with the time horizon of his investment," said Balasubramanian.
Therefore, long-term investors should go for dynamic bond funds which invest in a variety of debt papers, including government securities, corporate debt, certificate of deposits, commercial papers, etc. The fund manager has the flexibility to churn the portfolio as per the changing interest rate scenario.