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The poor performance of debt funds and the ongoing uncertainties around inflation, interest rates and other global events have raised questions in the minds of many.
Responding to these valid concerns, G Pradeepkumar, CEO, Union MF said, “While it is true, debt funds have not met investors’ expectations, this is also precisely the reason why they should look at these funds now.” To this Parijat Agarwal, Head Fixed Income, Union MF added, “Whatever we saw in the last 2/3 years was one-off events. Unprecedented pandemic and high inflation resulted in policy rate hikes.”
The industry experts shared these views at a recent Cafemutual webinar moderated by Nishant Patnaik, Associate Editor, Cafemutual.
Here are the key highlights of the webinar.
“How to position debt funds is a matter of asset allocation.”
How to position debt funds is a matter of asset allocation. Understand risk profile and time frame. Equity funds need a bare minimum horizon of three years. Anything below three years can typically be allocated to different categories of debt funds.
Also, notional loss owing to mark-to-market (MTM) valuation dissuades investors from debt funds. MFDs/RIAs should guide investors to treat debt funds as fixed deposits where they look into their value only on maturity and not daily. This will also simplify the overall debt narrative.
“We see good opportunity in the next 2/3 years when interest rate will reverse.”
In the near term, we can see some upticks in interest rates and inflation is the key driver here. However, central banks around the globe have started to stabilise the momentum and commodity prices, crude oil and edible oil prices are coming down.
Also, elevated interest rates are not sustainable and will come down. Besides, it is not structurally desirable to have high interest rate regime.
We thus see good opportunity in the next 2/3 years when interest rates will reverse and investors can make good returns.
“Debt funds are rightly placed in current times.”
As interest rates go down in the next 2/3 years and interest rate cycle turns around, there can be MTM gains. Debt funds can thus give better returns over other fixed-income asset classes and from this perspective, these funds are rightly placed in current times.
It is important to be rightly placed on the yield curve and investors with a short term horizon can opt for liquid and money market funds. While in the case of short to medium term view, corporate bond funds and gilt funds make more sense.
Long end funds are advisable for savvy investors.
“SIP in debt funds is an idea worth considering.”
SIP in debt funds is an idea worth considering. For instance, if an investor has a goal maturing in the next 2 years, a debt SIP makes more sense than an equity SIP. Just like equity, the debt market is also volatile and the concept of rupee cost average will work here. Thus, there is merit in having SIP in debt funds too.
“Compared to other debt fund categories, gilt funds carry low credit risk.”
Debt funds work in cycles and we are currently at a good stage of that cycle. The fact that gilt funds did not deliver in the past makes them attractive now. Accruals, MTM appreciation and tax benefits make their case strong. It is an appropriate time for investors with a 3 year plus investment horizon. Also, compared to other debt find categories, gilt funds carry low credit risk and are highly liquid.
With this rationale, we have launched Union Gilt Fund for investors looking at balancing risk and rewards. The open-ended scheme will invest atleast 80% of its assets in government securities of various maturities. It is open for subscription from Jul 18 to Aug 1.
You can watch the entire video.
