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I am a retired individual with an investment horizon of 5-6 years. I want to invest in a few debt funds to maximise my expected returns. Could you please suggest a variety of debt instruments?

-Name withheld on request

Debt funds work well for investors with low-risk appetites. So yes, debt funds are a good choice for you at this stage of your life. Rising interest rates have positively affected portfolio yields for debt mutual funds (MFs) across all categories. Investors can look into short-term debt, even though the period of rising interest rates is not regarded as the best one for debt investors, particularly for long-term debt instruments. Ultra-short and floating-rate debt funds are a good investment at this current juncture, given global economic instability brought on by war and its cascading effects on commodities and economies at large.

Over the last year and a half, we have seen attractive yields in the 4–6-year duration segment. Over this period, 10 Yr G-Sec have hardened to ~7.3+ %. You could look at these instruments to restructure your portfolio if you have a medium-term horizon. Your corpus could be invested in debt mutual funds (MFs) with a portfolio duration of one to three years, such as corporate bond funds, PSUs, or banking funds, where the effect of rising interest rates on overall returns is minimal. Target Maturity funds that invest in GILT (government securities) and SDL (State Development Loans), which mature in 2027-2028, can be looked at by investors as they offer attractive yields in the range of 7.2-7.4 %. Due to indexation benefits, their post-tax returns could be more efficient compared to 5-year FDs.

Currently, investing in debt funds that hold debt securities with shorter maturities carries a low interest-rate risk if risk-adjusted returns are the desired outcome.

Tarun Birani, Founder and CEO TBNG Capital Advisors. Queries and views at mintmoney@livemint.com

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