Why are Investors rapidly withdrawing from short-term debt mutual funds?

Reportedly investors took out Rs 10,286 Crore from short-term debt funds within a short period of time.

This leads us towards the question of such rapid pull out of the investment. The most significant cause is the rise in the yield as when the yield rises, the bond price experiences a downfall. This also reduces the net asset of values of the debt fund.

Since January 2021, the short-term debt funds are declining and continue to go down further. Investors who invested intending to earn within a short period of time are planning to liquidate the investment. They expected that the price of the yield won’t go up in near future hence now have fear to bear the loss in this contrasting situation.

In the forthcoming time, the rate with which interest rates are rising will not increase. There is some time remaining before entering into a hike in the interest rate in the market. The yield may rise in the future with an increase in the demand for loans in the next year. It is advisable for the short-term debt holders to wait till April and not liquidate their investment.

The result of the RBI monetary policy will help in making a better decision which is going to be held in April. In the current scenario it is advantageous to contain short- term debt fund.

The interest rate will not affect the investment amount if the balance is made with its tenure. Avoiding long-duration bonds and investing in short-term funds for suppose three-four years will give comparatively better returns.

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