Over the last few years, we have lived through a roller-coaster of global events. Post-COVID disruptions, geopolitical situations and other issues have pushed inflation to a record high across the world. As the inflation rose, the US dollar strengthened and the central banks, including RBI, kept the interest rates high to control inflation.

During that period:

• Fixed deposits offered nearly 7.5%
• Home loan, personal loan EMIs became very expensive
• Borrowing costs in general touched the peak.

But thanks to recent developments and reduced inflation, the interest rates globally have started coming down and so as in India also. As repo rates were reduced by RBI, the home loan and personal loan EMIs have reduced too. Borrowing costs are easing across the system. In last year alone, nearly ₹1 lakh crore has been saved collectively by borrowers like you and me because of the reduction in interest rates.

What does this mean for you as an investor?

As a natural behaviour, investors often chase returns. And right now, long-term debt funds are catching everyone’s attention because the recent returns look impressive. Thanks to the falling interest rate cycle. This naturally raises the question: “Shall I invest in long-term debt funds now?”

Before answering that, let us understand the basics.

Why do long-term debt funds do well when interest rates fall?

The long-term debt funds, like corporate bond funds or long duration funds, tend to do well when interest rates decline. This is driven by a simple principle:

Bond prices and interest rates move in opposite directions.

• When interest rates are high, the price of existing long-term bonds remains low.
  • When interest rates fall, the price of those existing bonds rises.
  • As bond prices rise, the NAV of long-term debt funds also rises.

This is why long-term debt funds often deliver strong returns during and/or just before a falling interest rate cycle.

So, should you invest in long term debt funds now?

Here are the three scenarios where long-term debt funds may be a suitable choice for you:

1. As part of your Asset Allocation

If your financial plan includes a strategic debt component, long-term debt funds can serve as part of the lower-risk allocation. Here, you are not chasing returns. You are simply maintaining the discipline as per your plan & asset allocation.

You may time your entry to take advantage of the rate cycle, but you don’t have to worry excessively about exit timing if your overall allocation remains in line with your financial plan.

2. If you don’t need the money for a minimum of the next 4–5 years

Long-term debt funds work best when they are held for at least 4-5 years. If you have a fixed withdrawal date and interest rates happen to be high during that time, your returns may be lower. But if your timeline is flexible, you stand a better chance of benefiting from capital appreciation during falling interest rates.

3. If you want something safer than equity but more flexible than fixed deposits

Maybe you don’t want to take aggressive equity risk, and at the same time, you don’t want your money invested in a fixed deposit. Debt funds offer:

• Flexibility and liquidity
• Potential capital gains when interest rates fall
• Taxation only when you redeem (no annual taxes like FDs)

If your goals are short-term or even medium-term, these debt funds may not be the right choice.

For short-term needs, more suitable options include:

• Liquid funds
• Ultra-short duration funds
• Low-duration funds

But remember, no investment works in isolation. A thoughtful asset allocation, clarity on timelines, and understanding risk will always matter more than timing the market. Hence, instead of chasing returns I suggest that you consult a financial advisor or a mutual fund distributor to build your portfolio scientifically and plan for the best asset allocation that suits your requirements.