Investors are shying away from debt mutual funds after the turn in the rate cycle caused bonds to lose their price pegs, punching a hole in the rate of return on investments in these instruments that are marked to market.
Bond prices and rates move in opposite directions, and although India hasn’t officially raised rates yet, the global interest rate environment isn’t as benign as they were a couple of quarters ago, with consumer prices in the US leaping to their highest in four decades. That has shortened the odds on the US Federal Reserve raising interest rates in bigger doses than pencilled in earlier.
The return from debt funds have also been meagre although a rally in the government bond market since the Reserve Bank of India’s “super dovish” bi-monthly policy announcement helped recouped losses partially.
“With rising yields, debt funds are at risk of losing value,” said Vikram Dalal, founder and CEO Synergee Capital. “Individual investors should not go for long term debt funds especially when the interest rate cycle is turning. Instead, they should opt for shorter duration debt funds or shorter term bank deposits. The latest rally following a super dovish bi-monthly credit policy, however, helped erase losses partly.”
The “medium to long duration” debt funds yielded 4.30% in one year, which is less than the rate State Bank of India offers for term deposits for a year. In the past one month, yields are at 0.64%, show data from Value Research, a mutual fund analytics firm.
In January, the category of funds witnessed a net outflow of Rs 27.3 crore to Rs 13,966 crore of assets under management, show data from AMFI, a mutual fund industry body. By contrast, ultra short duration funds garnered a net of nearly Rs 3,000 crore and the money market had a net inflow of Rs 4,718 core.
The benchmark bond yield dropped about 30 basis points since February 10, when the Monetary Policy Committee voted for a status quo in the policy rates. Markets widely expected an increase in the reverse repo, the rate at which banks park surplus liquidity with the central bank, from the existing 3.35%.
The gauge yielded 6.69 percent Monday, three basis points higher than its closing last Friday. A basis point is 0.01 percent.
“Returns from debt Mutual Fund schemes over the past year or so have been muted as interest rates are low,” said Joydeep Sen, fixed income consultant at Phillip Capital. “On top of it, of late, there is volatility in bond markets. However, investment or portfolio construction is not about chasing a particular return or chasing a particular market level, but proper allocation to equity, debt, gold, etc. that suits you.”
In the past three months, debt – long duration funds yielded 0.45 percent, show data, compared with more than 6% in the last one year.
In January, the category of funds witnessed a paltry Rs 3.28 crore in net inflows, show AMFI data.
“Investors should not worry much about returns and allocate as per investment objectives and risk appetite,” Sen said.
FAQs
Debt mutual funds endured a gruelling few years thanks to a combination of surging interest rates, galloping equity markets, and the withdrawal of tax benefits. But they are poised for a comeback as the interest rate cycle shifts.
Why are debt funds going down? ›
Since interest rates movement are inversely proportional to the bond prices a higher long tenure bond yield means less funds would be deployed in lower tenure bonds and current rates fall.
Why are mutual funds losing so much money? ›
Since equity mutual funds are market-linked2, they can be volatile. This means if the market goes up, they will generate higher returns, and if the market goes down, it can create chances of loss in mutual funds.
Why are mutual funds declining? ›
Because of the year-end many investors started booking profits and cutting back on fresh purchases to balance their book of accounts. So, demand reduced. Secondly, the Reserve Bank of India (RBI) started coming down hard on non-banking finance companies (NBFCs), which were a major source of stock market funds.
When should I exit debt mutual funds? ›
When it comes to equity, it is very important that, especially when you are thinking about long-term goals, you want to exit as soon as you have 2-3 years left approaching your goal and there are just 2-3 years to get there. That is number one.
Is it good time to invest in debt funds now? ›
Understanding the best time to invest in Debt Funds
Debt Mutual Funds cover a wide range of debt securities and each security is affected by the changes in interest rates. As a result, the best time to invest in Debt Funds is usually when interest rates are decreasing or expected to drop.
Should I still invest in debt funds? ›
Debt mutual fund investors will benefit
Investors who are planning to invest in the next financial year will not be benefitted much as bond yields' movement has already begun, not leaving much on the table for fresh investments." Bisen says, "Existing investors shall benefit more.
Has anyone lost all money in mutual funds? ›
There is no guarantee you will not lose money in mutual funds. The profit and loss in mutual funds depend on the performance of stock and financial market. There is no guarantee you will not lose money in mutual funds. In fact, in certain extreme circ*mstances you could end up losing all your investments.
Should I take my money out of mutual funds? ›
If you have money in mutual funds, using some of it to pay off debt, especially debt with high interest rates, might seem like an attractive option. But cashing in your mutual funds is not always the best way to become debt-free, and depending on how you hold those funds, you could end up with a big tax bill.
Should you get out of mutual funds? ›
However, if you have noticed significantly poor performance over the last two or more years, it may be time to cut your losses and move on. To help your decision, compare the fund's performance to a suitable benchmark or to similar funds. Exceptionally poor comparative performance should be a signal to sell the fund.
For a mutual fund to lose its value and become zero means that all the holdings in the portfolio must become zero or worthless. The probability of all the assets becoming zero is extremely low. It is quite possible that your investments are giving negative returns.
What happens if mutual fund collapses? ›
In the case of a Mutual Fund company shutting down, either the trustees of the fund have to approach SEBI for approval to close or SEBI by itself can direct a fund to shut. In such cases, all investors are returned their funds based on the last available net asset value, before winding up.
What happens to mutual funds if the market crashes? ›
However, during a market crash, stock prices come down. This, in turn, pulls down the performance of mutual funds holding these stocks. Companies, too, face a tough time with their operations taking a hit, and it takes time for stocks to recover. Performance improves only when stocks recover lost ground.
How risky are debt mutual funds? ›
Interest rate risk
It is also dependent on the maturity period of the bond. The longer the maturity period, the more exposure your bond has to the interest rate fluctuation. Hence, low duration debt funds are considered to be low risk debt mutual funds.
What is the average rate of return in debt mutual funds? ›
List of Debt Mutual Funds in India
| Fund Name | Category | 1Y Returns |
|---|
| Sundaram Short Duration Fund | Debt | 7.0% |
| UTI Short Duration Fund | Debt | 7.8% |
| Nippon India Ultra Short Duration Fund | Debt | 7.7% |
| UTI Low Duration Fund | Debt | 7.3% |
12 more rowsDebt mutual funds are considered to be relatively less volatile than equity mutual funds. While this may be true, especially over a long time, the probability of negative returns cannot be ruled out in the shorter term.
Are debt funds safe during recession? ›
Debt funds are good for the short-term period however gold investments are good in the long term due to market fluctuations. Every investor should maintain a balance between both of the investments and include gold in their portfolios depending upon the term of investment and market fluctuation risk.”
Why is going into debt bad? ›
Having too much debt can make it difficult to save and put additional strain on your budget. Consider the total costs before you borrow—and not just the monthly payment. It might sound strange, but not all debt is "bad." Certain types of debt can actually provide opportunities to improve your financial future.
Can debt funds beat inflation? ›
While short-duration debt funds and RBI floating-rate bonds deliver decent returns, they can only marginally beat inflation.
Is debt getting worse? ›
Federal debt has increased consistently since the late-2000s. Figure 1 shows the Congressional Budget Office's 10-year projections (labeled by the month and year of publication) of federal debt held by the public as a share of the Gross Domestic Product (GDP) in percent since 2007.
