Debt funds set to hit mother lode with double-digit gains in 2024

Easing G-sec yields put long-duration, gilt funds on winning track

Calendar year 2024 is proving favourable for popular asset classes. While the spotlight remains on the rally in equities — and to some extent, gold — fixed-income investments are also shining.

Certain categories of debt funds have capitalised on the decline in longer-dated government bond yields and are expected to deliver double-digit returns this year.

Several schemes in the long-duration and gilt categories have already yielded over 6 per cent returns in 2024.

Long-duration funds from HDFC, SBI, and Axis have recorded returns of over 7.5 per cent over the past six months, according to Value Research data.

This performance coincides with the decline in government security (G-sec) yields across various time frames, with the 30-year papers seeing the biggest decline.

The 30-year G-secs have seen their yields come down from 7.47 per cent at the start of 2024 to 7.05 per cent now. The 10-year yield has decreased from 7.17 per cent to 7 per cent, according to Bloomberg data.

A reduction in yields benefits bondholders, as bond prices and yields move inversely. Yield movements are primarily influenced by demand-supply dynamics, changes in interest rates, and other domestic macroeconomic and global factors.

“India is in a fundamentally driven bull market for bonds, supported by fiscal prudence, resulting in reduced bond supply. Simultaneously, demand has increased due to its inclusion in the JP Morgan Global Bond Index. The Reserve Bank of India’s well-managed monetary policy and the S&P upgrade for the Indian sovereign rating outlook have also led to capital appreciation,” said Deepak Agrawal, chief investment officer-debt, Kotak Mutual Fund.

Long-duration funds invest in longer-dated bonds, ensuring a Macaulay Duration of more than seven years, primarily in G-secs.

Gilt funds, similar in nature, must allocate 80 per cent of their corpus to government bonds, with no specific duration restrictions.

According to Suyash Choudhary, head of fixed income at Bandhan Asset Management Company, now is an opportune moment to add higher-duration government bonds to portfolios to avoid reinvestment risks.

“We believe India’s fixed income market is now a structural market with policy-driven macro stability, a large-scale economy, inclusion in the global bond index, and a potential medium-term depreciation trend for the dollar due to US fiscal policy. If our view is correct, it makes sense to mitigate future reinvestment risk by extending maturity on incremental investments made today,” Choudhary added.