This topic is slightly complicated, and it is not even adviced | FitRichSane

This topic is slightly complicated, and it is not even adviced that retail investors should go into the detail.
Let me try to explain the best I can, why experts are suggesting against debt investment for now.

At the base of it, debt investments are loans that companies have taken from you. Since they don't want to deal with individual investors, and you don't want to deal with individual companies, you give these loans via mutual funds.

Now, let's say this mutual fund you have invested in loans an amount to company A.
This company could have taken a loan from the bank at, let's say, 5%, before the RBI repo rate hike.
Now, let's assume the mutual fund gave the loan to this company at 6%. After deducting their charges, this 6% comes to you. You are fully invested here.

Now the rate hike happens.
Company A needs another loan.
Banks say that they won't give this loan for less than 5.5% now.
The mutual fund now gives this new loan at 6.5%.
Because of this, if a new investor wants to buy one of these loans, they'll obviously prefer to buy the new loan. (Yes, loans can be bought and sold. Imagine the new investor paying your entire principal to you and the future loan repayment from company A goes to this new investor now).
Because not many people want to buy your loan, the value of your own declines.
And this is why, in the short-term, RBI repo rate hikes cause problems for people invested in debt funds.

Here's my 2 cents:
We use debt funds for specific goals, rarely for long-term wealth creation. As long as this goal is being fulfilled, it's not very practical for us to keep track of rate hikes, inflation predictions, credit ratings etc.
Invest in good debt funds and achieve your goals.
If you think you can wait for and predict the last rate hike for the near future, your returns will increase by a small percentage.

If we want a very smooth upward graph for our investment, we must stick to FDs, PPF, and at max liquid or overnight debt funds.
If we are going for anything that has the potential for a higher return, we must deal with slight fluctuations and risk.


Hope it makes sense.