Debt fund YTMs stabilise, but peak still a few basis points away

YTMs of all debt fund categories, except credit risk and overnight, in a narrow range of 6.3-7.3%

The yield to maturity (YTM) of debt mutual fund (MF) schemes -- an indication of future returns -- has stabilised in the past couple of months after a steep rise between July and September 2022, shows Value Research data. Fund managers and advisors believe though YTMs have steadied, their peak is still a few basis points away, especially for funds that have a longer horizon.

"YTMs have risen for some categories in the past couple of months, while being stable for others. They can still go up but not much,” said Parijat Agrawal, head-fixed income, Union Asset Management Company.

As of November-end, YTMs of all debt fund categories, except credit risk funds and overnight funds, were in a narrow range of 6.3 per cent-7.3 per cent. According to fund managers and advisors, while the shorter horizon schemes like liquid and money market may not rise further with the next round of rate hikes, there's immense scope for longer horizon funds to improve their yields.

“I don’t think yields have peaked. The RBI is expected to hike rates at least one more time. Yields could also get pushed up due to tight liquidity in the banking system and tax outflows,” said Lakshmi Iyer, CEO-investment advisory, Kotak Investment Advisors.

“There is scope for YTMs to go up slightly. Apart from possible rate hikes, yields can go up on the back of a higher supply of bonds in the market,” said Anand Nevatia, fund manager, Trust MF.

Given the expectations of a further rise in YTMs, fund managers, investment advisors and MF distributors are advising investors to stick to shorter horizon funds. According to them, investments in longer horizon funds like gilt can be put on hold for a few more months.

"Till now, no funds with high quality papers have touched a YTM of 8 per cent. I am quite hopeful that it should happen in the next couple of quarters. Hence, I am recommending my investors to wait for a few more months before investing in medium-to-longer duration funds," said Rushabh Desai, founder of Rupee With Rushabh Investment Services.

Mutual funds saw outflows in 2022 as inflows died up in medium-to-shorter duration funds, such as corporate bond funds, banking and PSU funds, and gilt funds. These three schemes together witnessed a net outflow of Rs 73,400 crore in the first nine months of 2022, owing to the poor performance over the past year and the rate hike cycle. Bond prices are inversely related to interest rates. Bond prices fall when interest rates go up and vice versa.

Debt funds are still finding it hard to stem outflows, even as YTMs have risen to good levels and the rate hike is close to getting over. In October, investors withdrew a net of Rs 2,900 crore from these three funds and made a net investment of Rs 1,800 crore in November.