Debt MF returns may remain subdued on RBI's accommodative stance

Money managers say investors to look at medium-duration bonds

The Reserve Bank of India (RBI) pledge to maintain an accommodative stance means investors in debt mutual fund (MF) schemes will have to lower their return expectations.

Within the wide gamut of products debt MF categories, money managers say, investors will be better off investing in medium-duration schemes. Also, other categories such as corporate bond funds, banking & PSU debt funds and credit risk funds could be considered by the investors, they add.

“The RBI policy has reiterated our earlier view that investors should expect low single-digit returns from the bond market in FY22 and will have to increase their average maturity in order to optimize their risk-adjusted returns," said  Dhawal Dalal, CIO-fixed income, Edelweiss Asset Management.

Typically, the prices of fixed-income securities are dictated by prevailing interest rates. Interest rates and prices are inversely proportional. When interest rates decline, the prices of fixed income securities increase. Similarly, when interest rates are hiked, the prices of fixed income securities come down.

“We wish to highlight that investors at the short-end (up to two-year duration) will probably earn zero or negative real return (inflation-adjusted) in FY22. Prudent investors are requested to consider investing in high-quality bonds maturing in five years or higher through passively-managed target maturity bond index funds as well as bond ETFs to benefit from diversification, transparency, simple & clear investment objectives and predictability of returns for hold-to-maturity investors in our opinion,” added Dalal.

In the last one year, several categories in the short-term products like overnight funds, liquid funds and ultra-short duration funds had seen returns under 5 per cent as RBI has been lowering interest rates to support the economy.

While medium to longer duration funds invest in Macaulay duration of four to seven years, short term products have duration ranging from one to three years.

Pankaj Pathak, fund manager- fixed income at Quantum Mutual Fund said, “Investors should expect gradual rise in bond yields over medium term-term. We also expect very high volatility in interest rates going forward. Dynamic bond funds could be an option for investors with a long time horizon and higher-risk appetite. Conservative investors should stick to liquid funds.”

Dynamic bonds fund invests paper with wide-ranging duration. This category has delivered an average given return of 7.11 per cent in the last one year, shows the data from Value Research.

A set of fund managers believe that as the financial system gets normalized over the next few months, credit risk funds give strong returns.

“Credits remain an attractive play for investors with a 3-5 year investment horizon as an improving economic cycle and liquidity support assuage credit risk concerns especially in higher quality names. While we remain selective in our selection and rigorous in our due diligence, we believe the current environment is conducive to credit exposure,” said R Sivakumar, head fixed income at Axis MF.