Given the sharp decline in interest rates and inflation over the past two decades, investors should lower their return expectations from debt funds, said Marzban Irani, CIO - Debt, LIC MF.
At Cafemutual Confluence 2020 Investment Marathon, Marzban spoke about how to set right expectations from debt funds. He said that given the low inflation and low interest rate scenario coupled with earnings and valuations, investors should reduce their return expectations from debt funds. The debt fund category cannot match the kind of returns that investors have been getting since 2013.
Marzban said, “Currently, RBI monetary policy committee has a medium term target of keeping retail inflation at 4%. This indicates that the economy must readjust itself to a low inflation and low rate scenario. And investors have to lower their expectations from debt funds accordingly.”
Addressing the recent credit events in the debt funds, Marzban said that debt funds are designed to provide stability and gradual growth to investor’s capital. Therefore, the lessons from the recent credit events is that the complex debt funds chasing higher returns carry higher risk and hence cannot be termed as pure debt funds.
“Instead of focusing on higher returns, investors should look at risk adjusted returns to achieve near to medium term financial goals,” said Marzban.
The LIC MF debt CIO feels that products such as short term bond fund category often perform well in different market phases on a risk adjusted basis for 3 year horizon. He also recommended investors to invest in banking & PSU funds if their horizon is 3 years.
When asked about dynamic bond funds, Marzban said that it depends on the fund manager to take a call on duration risk. So if you have a clear time horizon in mind, it is better to invest in product categories that are designed for that time frame.
