Debt mutual funds are regarded to be fairly significantly less volatile than equity mutual funds. While this might be accurate, specifically more than a lengthy time, the probability of damaging returns can not be ruled out in the shorter term. There are about 16 unique categories of mutual fund schemes based largely on the maturity profile of their underlying securities. And, the typical return in most of the debt funds in 2021 has been damaging till date. Some of the debt fund categories are in damaging territory for more than the 3-month period as properly. “The duration products are giving negative returns, funds which are running a maturity of more than 2 years and above. The short term and above category are giving negative returns,” says informs Murthy Nagarajan, Head-Fixed Income, Tata Mutual Fund.
There is no exposure to equities in debt funds and the underlying securities incorporate a mix of dollars market place instruments, private sector bonds, government securities and so forth. Some debt funds are only into government securities known as Gilt funds, although these mostly in private sector bonds are Credit danger funds. So, what could be the explanation for the sudden fall in the debt funds NAVs that investors are seeing?
The impending impact of increasing inflation could be the explanation that most think. As development comes back not just in India but globally, inflation is getting noticed to rise. “Globally, yields have moved up due to higher commodity prices. The market is worried, this may lead to higher inflation in the coming years forcing central banks to hike interest rates,” says Nagarajan.
Rising yield (or falling bond costs) occurs when bond investors dump current bond holdings in expectation of higher-interest prices in forthcoming bonds. For development, the government wants funds and typically resorts to borrowing from the market place to meet the shortfall. “ Higher borrowing programme of the government is the main reason for upward movement in yields,” adds Nagarajan.
Noticeably, NAVs of Gilt funds and ‘Gilt Fund with 10-year constant duration’ are two categories that have fallen the most in the quick term. Nagarajan says “In the last one month, ten-year bond yields have moved up by 30 basis points, 2 years to the 5-year segment has seen yields moving up by 50 to 80 basis points, the 15-year segment yields have moved up by 40 basis points. The benchmark for the Gilt fund is 11 years and market players if they are holding any positions, could have made losses. As the yield curve has moved up across the maturities, we are seeing this steep fall in Gilt funds.”
Strategy for investors
So, what should really investors do now? “We advise investors to stick to the asset allocation framework and be patient to tide over the volatility in different asset classes. Changing asset allocation can be disastrous for the investors as all asset classes have their ups and downs,” suggests Nagarajan.
However, if the spike in the yields continues in close to future, it might be superior for investors to shift funds inside the debt fund category. “ Investor who require the money in the next 6 month to one year, can look to redeem from the high duration products and invest in low duration products.” and, for investors hunting to park funds in debt funds for meeting targets which are about 3 years away, Nagarajan says “The low duration category and money market category could be the categories in which the first-time investors can look at investing. As we expect interest rates may move up we don’t recommend long-duration funds. Investors may only invest in funds which have a good portfolio and avoid funds taking credit calls.”