2020 has been a challenging year for the debt market as it has witnessed decline in interest rates and a series of credit events.
Except for long duration funds and gilt funds, most debt funds have delivered single digit returns in the last one year. Value Research data shows that long duration funds have given 12% returns while gilt funds have delivered 11%.
Going ahead, data on growth and inflation would be closely monitored as they would have a major influence on RBI’s policy decisions.
What to expect
Avnish Jain- Head Fixed Income, Canara Robeco MF
Debt funds returns are likely to moderate in near term.
Liquidity is likely to sustain as RBI is committed to support growth
While inflation is expected to show a down trend from now on, the extent of decline is likely to determine RBI policy measures
2021 is likely to remain an extremely volatile year across asset classes. News on the new variants of coronavirus / vaccine rollout is likely to drive risk assets
Central banks in advanced countries as well in emerging economies have indicated that they are likely to remain accommodative
Dinesh Ahuja, Fund Manager – Fixed Income, SBI MF
While the RBI has committed to maintain its accommodative stance, the latest monetary policy committee minutes have shown that the recent higher than expected inflation is a cause of worry
A premature roll back of the accommodative policies could risk the nascent recovery
Incoming data, particularly growth and inflation, would have to be closely watched
Going ahead, successful containment of the virus would be a key trigger for future policy decision making
Globally, large infusion of liquidity by central bankers has resulted in a renewed risk appetite, leading to a rally in global commodity prices.
Murthy Nagarajan, Head- Fixed Income, Tata MF
Growth continues to remain weak necessitating accommodative monetary policy for current year and the next financial year
Scope for rate cuts are limited and returns in debt schemes are expected to be around the running yield of their respective portfolios
However, given low growth expectations in the coming years, inflows in debt schemes are expected to remain robust but may not match the inflows that we saw last calendar year
Rahul Pal, Head Fixed Income, Mahindra Manulife MF
A normalization of domestic economy may prompt a gradual withdrawal of liquidity and might be negative for the shorter end of the yield curve
Possibility of the yield curve flattening, credit spreads expanding and the money market rates dropping the reverse repo anchor
Interest rates have bottomed out and would move up through the next year
What to recommend
Avnish Jain
- It is recommended that investors should look at investment from 3-5 year horizon.
- Recommend high credit quality funds which are short duration funds or corporate bond funds to investors as credit market recovery is still a long way off
- For investors having higher risk appetite, long duration funds like income, dynamic and gilts also present good opportunities for investment as the yield curve is very steep and is likely to flatten in the medium to long term
Dinesh Ahuja
- Investors having a minimum investment horizon of 3 years could allocate money to any of these categories - short-term, medium term, gilt and dynamic bond funds
Murthy Nagarajan
- Recommend good quality short term bond fund, banking and PSU funds for investors having a six months plus investment horizon
- For investors having a time horizon of less than one month, we recommend investors to invest in ultra-short term bond funds, 1 to 3 month in money market funds, 3 to 6 month to invest in treasury advantage funds
Rahul Pal
- Recommend investors with a shorter horizon to continue investments in ultra-short term and low duration funds
- For investor with longer time horizon, look at short term funds with a small allocation to credit risk fund
