Why Is Your Debt Mutual Fund Showing Negative Returns? The Bond Market Explained

As a result, demand for old bonds decreases, making them less attractive. Since all debt mutual funds value the bonds in their portfolios at the daily market price, this decline in bond prices directly impacts the fund's NAV. In financial parlance, this is called the mark-to-market effect.

Over the past few months, the weakening rupee, skyrocketing crude oil prices due to global geopolitical tensions, and the continued withdrawal of foreign institutional investors have significantly increased pressure on the financial markets. As a result, the 10-year government bond yield in India has now crossed the psychological level of 7%, clearly putting pressure on the NAVs of long-term debt funds.

The biggest question now is not whether you should invest in debt funds, but rather where and with what strategy you should invest your money. By segmenting your time horizon and goals, this market will become much more comfortable for you.

In case of a very short-term investment goal, it is recommended that long-term debt funds be avoided at this stage. Instead, one should opt for short-duration funds like money market funds, ultra-short-duration funds, and low-duration funds. These kinds of funds invest in bonds issued by governments and private organizations. Because of their short durations, these funds remain immune from interest rate risks.

On the contrary, long-term investments have a great chance at this stage. In case the target horizon is 15-20 years, then one should consider investing in long-term government bonds or state government bonds. Right now, one is presented with a unique chance of taking advantage of the high yields offered by the market in the next 20 years. In the coming years, when there will be an economic cycle reversal and interest rates fall, these bonds will gain substantially.