Debt Funds invest in fixed income securities like corporate or Government bonds and money market instruments. These securities are interest bearing instruments that pay a fixed interest (coupon rate) to investors at regular intervals and pay the invested amount (principal) at maturity. The prices of these securities are directly affected by interest rate changes. Bond prices and interest rates are inversely proportional.
A bond’s coupon rate is fixed at the time when the bond is first issued at certain price (Face Value). If interest rates fall below the coupon rate, the bond looks more attractive as it carries higher interest than currently available in the market. Hence, demand for such bonds go up, pushing their prices up. If interest rates rise, these bonds look unattractive and their prices fall
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