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Debt funds have been out of favour for almost 2 years now as they lost the potential to beat inflation post covid amid high inflation and low interest rate environment. However, the situation has changed a bit in the last couple of months as RBI has raised the repo rate.
The yield-to-maturity of almost all debt funds are now above 5%. For example, the YTM of overnight funds has risen to 5% and for liquid funds it is 5.6%. In the case of corporate bond funds, the YTM is close to 7%.
Has this improvement in performance brought back debt funds in MFDs' recommendation lists? It surely has but most MFDs continue to avoid medium and longer duration funds.
Ranjit Dani of Think Consultants shares with us that he has just re-started recommending debt funds but only short-term schemes. "The YTM of longer-duration funds may have reached 7-8% but their high expense ratios bring it down to 5.5 to 6.25%, which is not very attractive for investors who are not in the highest tax bracket," he said.
Viral Bhatt of Money Mantra is also sticking to shorter-term investments in debt. "For less than 3-year horizon, floating rate fund and target maturity funds are good options," he said.
Babu Krishnamoorthy, Chief Sherpa at Finsherpa Investment Services never stopped recommending debt funds as he ensures that the investment horizon and the average duration of the fund is similar. "When the duration of the fund and the investment horizon are same, the impact of mark-to-market changes is not that significant," he said.
Shifali Satsangee of Funds Vedaa believes that investors can look at target maturity funds for longer-term investments as they come with low expense ratio. "Target maturity is ideal for investors in the higher tax brackets, provided they can hold the investment till maturity," she said.
