What will be the effect of rising interest rate on short term and long-term debt funds?
Rising interest rates affect the value of debt instruments in the secondary market that have a longer tenure. For example, by SEBI regulation all debt instruments that have a maturity of more than six months are valued on a mark-to-market basis, i.e. they are valued in terms of their market value. In the case of a rising interest scenario, the yield goes up resulting in the market value of such securities going down, causing capital loss. In case of short term debt however, there is no mark to market component or that component is extremely small, and the income is mainly accrual income. As the MTM loss is lower, hence the adverse impact on returns is controlled.
