Debt MF returns down. Time to change your strategy?

After a good run of one year, long duration debt funds appear to be losing their sheen. These debt mutual fund schemes which were topping the charts during the equity market fall in 2020 are seen at the bottom of the return chart right now. Experts believe that the ‘rally’ in the longer term bonds is behind us and these meagre returns might continue for some time. Debt mutual fund investors need to take a fresh look at their portfolio in this situation. In the last three months, the debt mutual fund categories have fallen in to the negative return zone. Long duration funds and gilt funds have fallen the most in three months. Scheme name 1-month returns (%) 1-year returns (%) Long Duration -1.60 6.31 Gilt with 10 year Constant Duration -1.30 6.83 Gilt -1.06 6.60 Medium to Long Duration -0.96 6.38 The primary reason for the dip in returns is the rise in bond yields. The 10-year bond yields touched 6.20% on 22nd February, 2021 - the highest since 21st April, 2020. The reason behind the rising yields is the expectation of oversupply of bonds in the coming days. “The government, in this year’s Budget announced an extra Rs 80,000 crore borrowing for this fiscal and Rs 12.05 trillion of gross market borrowing for the next. In the current fiscal, the government has already borrowed more than Rs 13 trillion from the market and sta­tes an additional Rs 10 trillion. This has resulted in the yield crossing the 6 percent marker set by RBI, thus making bonds an expensive proposition for borrowing,” says Prateek Mehta, Co-Founder and CBO, Scripbox. Fund managers believe that this is also an opportunity for investors to lock-in higher yields in funds. Data suggests that India is expected to bounce back strongly this year on the back of higher govt spending, part of which will be financed via larger than usual market borrowings, which may induce the RBI to cut back on stimulus. “RBI has already given its first hint by announcing variable reverse repo operation and restoring of CRR gradually. With growth set to bounce back, this is also likely to increase the credit growth into the economy. Taking into consideration that borrowings are going to be higher by government as well as corporate, the spreads are likely to widen going ahead proving a good opportunity for investors to lock in higher yields and attractive spreads,” says Mahendra Jajoo, Headp-fixed income, Mirae Asset, India. In this scenario, debt mutual fund investors need to take a re-look at their investment strategy. If you are a risk-averse investor, looking for safety of returns and capital, advisors believe you should invest in very low duration funds. “Liquid, ultra short-term, low duration funds will enable them to mitigate the risk of interest volatility,” says Prateek Mehta. However, fund managers believe that long term debt investors can stick to their holdings in bond funds and keep investing. “Investors with asset allocation approach, better option might just be to stick to a disciplined approach rather than worrying too much about market volatility. For those investors who wish to take a tactical call or who are too worried about possible increase in rates or higher volatility, low duration category may sound interesting,” says Mahendra Jajoo.

from Economic Times https://ift.tt/3pW5v2K