Yield-to-maturity in debt mutual funds continue to trend downwards

Wrong end of the curve: YTM of most scheme categories 15-65 bps lower at the end of April

The yield-to-maturity (YTM) in debt mutual funds (MFs) has continued to trend downwards after hitting post-pandemic highs in February.

At the end of April, the YTM of most scheme categories were 15–65 basis points (bps) lower compared to those in February.

MFs are expected to report further moderation in YTM when they release the end-May figures in June.

YTM typically signifies the ballpark estimate of future returns of debt MF schemes.

Experts attribute the moderation in yields to a moderation in inflation and the status quo on repo rates in the Reserve Bank of India policy.

“This month has been positive for the Indian debt market, with yields softening by another 10-15 bps across the curve. Better-than-expected Consumer Price Index numbers at 4.7 per cent from the previous reading of 5.66 per cent gave debt markets a leg-up. Moreover, Indian bonds were supported by large purchases of foreign funds. Unless economic data weakens significantly in India, it is unlikely bonds will rally further in the near future,” says Sandeep Bagla, chief executive officer, TRUST MF.

With the bond yield curve staying flat, the YTM across debt schemes continues to be in a narrow range. Fund managers believe that the three- to four-year part of the yield curve is the most attractive to investors right now.

“Investors with a medium- to long-term investment horizon can look at funds having a duration of three to four years with predominant sovereign holdings as they offer a better risk/reward ratio. Investors with an investment horizon of six to 12 months can look at money-market funds as yields are quite attractive in the one-year segment of the curve,” says Puneet Pal, head-fixed income, PGIM India MF, in a recent note.