The Monetary Policy 2003-04 came as a surprise to many.

The RBI governor maintained a status quo on the key indicators bank rate (at 6.0 per cent) and cash reserve ratio (at 4.5 per cent).

So what does this mean to the retail investor?

First, let us understand a few basics. In the build-up to the Monetary Policy, there was some anticipation of rate cuts in at least one of the key indicators (bank rate, cash reserve ratio, repo rate).

• RBI's Monetary and Credit Policy: Complete Coverage

This led to some volatility in debt markets and we even saw the 10-year benchmark government paper yield dipping to below 5.0 per cent and then rising to over 5.1 per cent.

However, the RBI has maintained status quo and has left the rates untouched. Debt markets have taken unkindly to this move and there has been a sharp rise in bond yields.

The possible reasons for RBI maintaining a status quo on rates could be sufficient liquidity in the system and relatively high inflation.

However, the Central Bank's bias towards a softer interest rate regime persists and money is available to corporates at attractive rates even at this level.

From the retail investor's perspective how does this affect his investments?

For one, bond yields are going to rise (i.e. bond prices are going to fall) given that yields had fallen significantly in anticipation of a rate cut.

Based on this, investors in debt funds will see an erosion in their debt fund investments with a fall in the net asset value (NAV).

Does this mean that debt funds no longer hold any value for the retail investor?

Far from it! The 'value' in a debt fund has little to do with a rate cut. Debt funds score over comparable investment avenues in terms of better liquidity, tax-efficiency (dividends are tax-free and long term capital gains are eligible for indexation benefit) and the potential to clock higher growth from trading in bonds/G-Secs.

Fixed deposits and bonds (infrastructure bonds, US64 bonds, GOI Bonds) do not fare as well on these parameters.

That's how debt funds provide more value to investors.

If you are looking at investing in debt funds, then you don't necessarily need to do a rethink in view of the decline in debt fund NAVs. On the contrary, you can use the fall in debt fund NAVs as an opportunity to enter a good debt fund with a solid track record.

Remember rate cut or no rate cut, the need for a stable instrument like a debt fund in your portfolio is perennial and a little volatility does not change that.

And if volatility really scares you, there is yet a product that could save the day for you – the floating rate debt fund. Floating rate debt funds have assumed an important role with the threat that volatility poses to your instruments. At times of rising bond yields they provide a stabilising edge to your portfolio and must be looked upon as a must-have investment avenue in these times.