Despite there being no capital gains and indexation benefits in debt mutual funds, financial planners insist on them for asset allocation, due to their long-term outperformance over bank FDs.

A heated equity market and impending cut in interest rates are good reasons why you should put some money in debt funds now if you haven't already. Devang Shah - Head Fixed Income - Axis Mutual Fund says, "Inflation is trending lower everywhere, in India and the rest of the world. Second, the external sector looks quite comfortable and stable, and the current account deficit may be well contained. Third is that the growth has started showing a bit of slowdown in some high frequency indicators".

The demand-supply gap: "One, there are flows which are coming in the debt market on account of Indian G-sec bonds getting introduced in the JP Morgan index. Secondly, fiscal consolidation leads to lower supply. Investors like provident funds, pension funds and insurance companies are expected to lead to very strong demand for government bonds", explains Shah. Experts anticipate that the RBI will likely initiate rate cuts in the next six to 12 months down the line. The global central banks from developed markets and emerging markets have started cutting rates. We believe that the US fed may start cutting rates from September. We anticipate that we may see rate cuts from the RBI in the next six to 12 months of up to 0.50 percent, believes Shah. Bond prices and interest rates have an inverse relationship, so when interest rates fall, bond prices go up. This will result in appreciation of the bonds value that the debt funds hold, which in turn, leading to higher returns.

Did you know that you could start SIPs in debt funds too? Debt funds too exhibit volatility (albeit, low) as they are prone to interest rate risks. Due to Rupee Cost Averaging, SIPs ensure that the volatility of the investment is reduced over the tenure of the investment. Investors can consider the eight debt schemes that are part of the MC30 basket, that have a proven track record and have invested in high-quality assets. To know more about MC30, click here. The charts below show the five-year rolling SIP performance (XIRR %) that were calculated from the last 11 years' NAV history. Portfolio data as of July 2024. Debt funds help in asset allocation, provide easy liquidity and help us create an emergency corpus. 30 Sovereign Gold Bonds coming up for premature redemption: Should you surrender or hold units?

Axis Short Term FundCategory: Short Duration FundsAverage of 5-year SIP rolling return (XIRR): 7.2%Fund managers: Aditya Pagaria and Devang ShahAverage Maturity: 4 yearsYield to Maturity: 7.7%

HDFC Short Term Debt FundCategory: Short Duration FundsAverage of 5-year SIP rolling return (XIRR): 7.4%Fund manager: Anil BamboliAverage Maturity: 4.1 yearsYield to Maturity: 7.7%30 years SIP: How have MFs built wealth for long term investors

ICICI Prudential Short Term FundCategory: Short Duration FundsAverage of 5-year SIP rolling return (XIRR): 7.3%Fund managers: Manish Banthia and Nikhil KabraAverage Maturity: 4.1 yearsYield to Maturity: 7.9%