Investors are shying away from debt mutual funds as bonds have lost their value pegs due to changes in the rate cycle, punching a hole in the rate of return on investments in these instruments that are marked for the market.
Bond prices and rates move in opposite directions, and although India has yet to officially raise rates, the global interest rate environment is not as benign as it was a few quarters ago, with consumer prices in the US jumping to their highest levels. Was putting four decades. This has reduced the odds on the US Federal Reserve raising interest rates by a larger amount than previously.
Returns from debt funds have also been lower, though a rally in the government bond market since the Reserve Bank of India’s “super dovish” bi-monthly policy announcement helped partially offset the losses.
Vikram Dalal, Founder and CEO, Synergy Capital, said, “There is a risk of losing value of debt funds due to higher yields. “Individual investors should not go for long duration debt funds, especially when the interest rate cycle is changing. Instead, they should opt for short duration debt funds or short tenure bank deposits. However, the latest rally followed by a super dovish bi-monthly credit policy helped partially erase the losses.
Debt funds with “medium to long duration” gave a return of 4.30% in one year, which is lower than the rate offered by State Bank of India for one-year fixed deposits. According to data from mutual fund analytics firm Value Research, the yield has been 0.64% in the last one month.
In January, the fund category saw a net outflow of assets under management to Rs 13,966 crore from Rs 27.3 crore, data from mutual fund industry body, AMFI, showed. In contrast, Ultra Short Duration Funds generated a net worth of around Rs 3,000 crore and a net inflow of Rs 4,718 crore into the money market.
Benchmark bond yields have fallen by nearly 30 basis points since February 10, when the Monetary Policy Committee voted for a status quo in policy rates. Markets were widely expected to increase reverse repo, the rate at which banks park surplus liquidity with the central bank, from the current 3.35%.
The gauge rose 6.69 per cent on Monday, three basis points higher than last Friday’s close. One basis point is 0.01 percent.
Joydeep Sen, Fixed Income Consultant, Philips Capital said, “Debt mutual fund schemes have had lower returns in the last one year due to lower interest rates. “On top of this, lately, there has been volatility in the bond markets. However, investing or portfolio building is not about chasing a particular return or chasing a particular market level, but proper allocation to equity, debt, gold etc. that suits you.