Dealing With Debt Funds

Do not invest in debt because interest rates  are going up. You may have heard this advice and, it may have puzzled you. Why would debt be a bad investment if interest rates are going up? Here is an explanation of this paradox. For example, you have invested Rs1,000 in a one-year fixed deposit account, at an interest rate of 6.5 per cent. The interest rate on new fixed deposits is hiked to seven per cent. A year later, you receive Rsfive less than someone, who invested at the higher rate. Conversely, if the rate was cut to six per cent, you receive five more. This example indicates how the value of debt can decline if interest rates go up.  Contrariwise, it goes up if interest rates fall. There are important implications. Assume the interest rate has risen. You decide to redeem the fixed deposit. The bank will charge a fee for early redemption. So, you try to sell it to...