Debt funds seen as good investment avenue due to hopes of further rate cuts

Yields are higher by 10-15 basis points without any fundamental change to the outlook

Debt funds which invest in government securities and corporate bonds are seen as a good investment avenue for those with a 12-24 month horizon, as the Street is expecting further rate cuts of 25-50 basis points (bps) in the current financial year.

According to data from Value Research, these funds have substantially lagged equity counterparts on one-year return. For example, the category average of gilt medium-term and long-term funds have been 14.75 per cent, while that of gilt short-term funds have been 8.91 per cent. Similarly, the category average returns of income funds has been 11.57 per cent.

“The Consumer Price Index (CPI)-based inflation is still undershooting the Reserve Bank of India (RBI)’s latest trajectory. That is what matters. Yields are higher by 10-15 bps without any fundamental change to the outlook. From that perspective, it is a good time to invest in debt funds,” said Suyash Choudhary, head-fixed income, IDFC Mutual Fund.

The yield on the 10-year benchmark bond had risen to eight per cent earlier this month. From there, it has seen some correction. On Monday, the yield ended at 7.9 per cent. Corporate bond yields have also been rising.

“The data suggests further softening in inflation and this should be supportive for the market. The bond market had seen so much pressure in the past due to a weakening rupee, expectations of the US Federal Reserve’s rate increases and global bond yields rising. In the past, bond yields went up by 10-15 bps. When these concerns fade, the market will re-focus on inflation data and expectations of a rate cut,” said R Sivakumar, head of fixed income, Axis Mutual Fund.



CPI inflation for April eased to 4.86 per cent, the lowest in four months, on the back of another month of declining food prices. The latest inflation numbers raised hope of a rate cut by the central bank at the monetary policy meeting in June.

In the earlier review, RBI kept the repo rate, at which banks borrow from it, unchanged at 7.5 per cent. However, since the start of 2015, RBI has cut the rate twice by 25 bps, in January and March.