In an expected scenario of rising yields in 2022, floating rate funds which re-adjust their yields more or less in pace with the existing yields suits the most.
The interest rate downtrend being witnessed over the last few years may see a pause in 2022. While the long term trend seems to be on the way down, this year may witness a slight increase in the rate of interest and any downside is not expected by most industry watchers. What may play the spoilsport is the rising inflation. “We expect inflation to peak in the first quarter of 2022 and then gradually reduce and move towards the Central Banks’ target rates by the end of 2022. Going further into 2022, the supply chain bottlenecks are also expected to ease considerably and if a sudden rise in the crude oil prices doesn’t play truant, we may have a softer inflation by end of 2022,” says Abhijit Bhave, CEO, Fisdom Private Wealth
And, unless inflation remains within RBI’s target range, a hike in interest rate may not be ruled out either. “With most of the world economy slowly getting back to normalcy, and central bankers acknowledging inflation expectations appearing more permanent than transient, we expect rates to move up by approximately 50 to 75 bps in 2022, says Anand Nevatia, Fund Manager, Trust Mutual Fund
Debt fund investors in 2022, therefore, need to be careful while investing in them. “As we expect interest rates to be volatile, it is best to avoid funds investing in long-dated securities. Thereby, investors can consider investing in securities with shorter maturity such as short duration funds and banking & PSU funds,” suggests Rajan Pathak, Co-Founder & MD, Fintso.
“The other interesting option, in an expected scenario of rising yields in 2022, would be mutual fund investments in a floating rate fund, which will re-adjust their yields more or less in pace with the existing yields,” adds Bhave. Dynamic Bond funds alter the tenor of the securities in the portfolio in line with expectation on interest rates. The tenor is increased if interest rates are expected to go down and vice versa. Floating rate funds invest in bonds whose interest are reset periodically so that the fund earns coupon income that is in line with current rates in the market, and eliminates interest rate risk to a large extent.
Choose to invest in debt funds only when you have to save for goals which are not more than three years away. Choosing the right debt fund will help you generate high tax effective returns and not end up earning lesser returns.
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