How to invest in debt funds to beat high inflation and bond yields

High bond yields and rising inflation have spooked many debt fund investors. The bond market has been highly volatile amid rising inflation which recently neared the 7% mark for the first time in the last 17 months. In a surprise meeting the Reserve Bank of India (RBI) has decided to hike the repo rate by 40 basis points to 4.40%. Overall, this was expected, as inflation moved into the threatening zone in March. While rising bond yields and inflation are negative for debt mutual funds, the impact is not same across all the debt fund categories.

As per Pankaj Pathak, fund manager-fixed income, Quantum Mutual Fund, the bond yields have discounted some of the rate hikes by the RBI, but we will see a highly volatile bond market going forward particularly due to demand and supply situation, and global uncertainty. We may see some rise in bond yields, probably by another 25-30 basis points, Pathak adds.

For conservative investors or for those who have a shorter time frame, Pathak recommends to invest in short term debt funds like liquid funds and money market funds. "These funds tend to gain when RBI starts hiking rates. But long term debt fund space may see a lot of turbulence in the rising bond yields scenario," he adds.

Those who have higher risk appetite and can hold their investments for at least three years, as per Pathak, may look at dynamic bond funds. These funds, he says, are very well positioned to gain in the current environment.