Now is a good time to lock into debt mutual funds at high rates: Here are the best debt MFs | Jobs Vox


This year was not very good for debt funds. In the year An interest rate hike in 2022 has boosted bond yields and depressed returns on debt funds. Most debt fund categories have delivered returns of less than 5% even when inflation has hovered around 7% (see chart). But now the tide seems to be turning for debt. Sankaran Naren, ED & CIO, ICICI Prudential Mutual Fund, said, “Debt funds look attractive at present due to high inflation and rising interest rates for the next few years.

There are indications that interest rates are moving towards a higher level at the RBI’s next review meeting in February 2023. Given the significant front-line tightening in monetary policy and the weakness of economic growth, there is an issue. Pankaj Pathak, Fund Manager – Fixed Income, reckons Quantum Mutual Fund will help the RBI to slow down or even pause the rate hike. “We believe, the peak of central bank brutality is now behind us. It is time to look beyond the market noise and identify emerging opportunities in the bond market,” added Pathak.

Most experts are confident that debt funds will deliver good returns in the coming months. Higher bond yields are a good opportunity for investors to lock in current levels, says Roopali Prabhu, CIO and Associate Products and Solutions, Sanctum Wealth. “The outlook on debt financing is constructive. Debt funds should perform very well in the next one to one and a half years. Investors should gradually increase their allocation to debt schemes, said Sandeep Bagla, CEO, Trust Mutual Fund. Yield to maturity (YTM) of all categories of debt funds has increased significantly over the past 12 months and is currently over 7% (see graphic). YTM is an indication of the potential return an investor can expect if the bond is held in the portfolio until maturity.


However, YTMs and actual returns in open-end debt mutual funds do not always match because of portfolio volatility, liquidity and other factors such as changes in ratings and interest rates. Current high yield is not the only consideration for debt funds. These funds offer many other advantages in terms of liquidity, safety and convenience (see story on page 6). Short-term yield is over While debt funds are expected to perform well, not all categories generate the same returns.



Short term products are taken up

In the year It is growing significantly in 2022, but long-term yields have softened since June, flattening the yield curve. The spread (or the difference between the 10-year bond yield and the 3-month Treasury bill) fell from 3.1% in May to 0.93% in December. Short-term yields rose following RBI’s rate hike and tight bank balance sheet. Last week’s 35 basis point increase in the repo rate was the fifth rate hike this fiscal year. As of May 2022, the yield has increased by 225 basis points and now stands at 6.25% (see chart).

The monetary tightening appears to have been effective as inflation has moderated in recent weeks. Consumer price inflation rose to an 11-month low of 5.88% in November. This is the first time that retail inflation has fallen below RBI’s maximum tolerance level in 2022. This means that after the February 2023 policy review, the RBI will hold off on rate hikes for a long time. However, the RBI’s December 2022 policy review turned out to be more hawkish than expected and did not change its stance on lifting accommodation. Analysts expect a small 25 basis point hike at the next rate meeting in February, which would take the reserve ratio to 6.5%.

Also, the risk of growth in the worrisome rate increase could lead to the end of the current rate cycle. India’s second quarter GDP fell to 6.2% on weak performance of the manufacturing sector. RBI lowered its GDP growth forecast for 2022-23 to 6.8 percent from 7 percent. Suvodeep Rakshit, Senior Economist, Kotak Institutional Equities, said, “Focusing on tight core inflation, the skew, now, remains in the last 25 bps hike, and will remain so for longer.”

Long-term rates have stabilized.

10-year bond yields lagged short-term bond yields as CPI inflation softened, pension funds increased demand for longer-dated securities and crude oil prices fell. The 10-year yield has fallen more than 31 basis points since hitting a high of 7.61% in June and is currently at 7.29%. Inflation in India and the US, falling oil prices and improved government finances are expected to moderate long-term bond yields. However, unexpected factors such as an increase in the Federal Reserve’s rate hike, increased pressure on the balance sheet, an indication of a higher repo terminal rate or inflation could cause long-term rates to rise in the future. .


Analysts expect the 10-year bond yield to trade between 7.2-7.5% in the near term. Another factor that could increase volatility in the long-term bond market is the narrowing spread between Indian and US bond yields. Rising US 10-year bond yields are making Indian bonds less attractive to foreign investors. The spread between India and the US has narrowed to 3.81% in early 2022 from 4.83% in December. In the year Foreign investors sold $1.5 billion (excluding debt-VRR) of debt investments from Indian markets by 2022, according to data from NSDL.


Experts have different opinions about long-term funds. Sampath Reddy, CIO, Bajaj Allianz Life Insurance is of the view that long-term funds could be beneficial as most of the rate hike is baked into the current high bond yields. “With India’s interest rate hiking cycle largely behind us, one can look to lock in higher bond yields by investing in long-term debt securities,” he says.

Other experts believe that because the interest rate cycle is unlikely to reverse in the near term, increasing duration at the long end of the curve may not be productive. “The 10-year G-S with a yield of 7.25% looks expensive at present. With the RBI’s inflation target hovering around 6%, the 10-year G-Sec will only be attractive at yields of 8% or more. As a result, increasing tenure on the portfolio may not make sense at this point,” says Manish Bantia, Deputy CIO – Fixed Income, ICICI Prudential Mutual Fund.

The best debt mutual funds

Choose debt plans that match your investment horizons.


What should investors do?

As things stand, short- and medium-term funds are becoming more promising because the long end of the argument is marred by economic uncertainty. A hold or buy strategy (investing in a debt instrument with a high coupon and holding it to maturity) may yield better returns. On the other hand, medium-term funds tend to have lower average maturities compared to long-term funds, thus helping to reduce the risks of interest rate fluctuations associated with macro headwinds.

“Interest rates are expected to remain in a narrow range and fixed income returns in most categories will contribute more through interest accretion,” said Pathak of Quantum AMC. He believes that 3-5 year government bonds currently offer the best balance between yield and duration. That’s the average maturity of medium-term bond funds (see charts). Investors with a horizon of 1-3 years can look at selected short-term and corporate bond funds. If your investment horizon is less than one year, Prabhu of Sanctum Wealth recommends money market and liquid funds. Open-end debt funds are subject to volatility depending on how bond yields move.

Investors looking for a specific type of security can go for target maturity funds. Introduced three years ago, these funds come with a fixed maturity and pay the full value, including interest, to the investor. The fund manager simply buys time-matched instruments and holds them until maturity. Any additional bond purchases are aligned with the remaining maturity of the fund. Investors are locked into the corresponding maturity bond yield by avoiding interest rates significantly.

Can SIPs also work in debt funds?

SYSTEMATIC INVESTING works well in equity funds. But investing in debt funds through SIPs may not yield the same results. Still, it’s not a bad idea to hedge investments in debt funds. SIPs are particularly suited to volatile bond funds, long-duration and funds that are sensitive to changes in interest rates. Rushabh Desai, Founder, Rupee with Rushabh Investment Services, said investors should not chase yield but instead choose funds with maturity.

A profile aligned with their investment horizons.

If you invest through SIP, ensure that the duration of the SIP matches your time horizon. If the duration is three years or more, it doesn’t matter how the products move over time because it will eventually average out. For investors with short time horizons, surprise makes little sense. If you have enough investable surplus on hand, invest it immediately. Niranjan Awasthi, Head – Product, Marketing & Digital, Edelweiss Mutual Fund, said, “If production continues at current levels, a six-month SIP may work.


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