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Most debt mutual fund schemes are set to deliver ‘FD beating’ returns if we go by their present yield-to-maturity (YTM). As per Value Research data, the average YTM of debt funds range between 5% and 7.5% right now. It even goes up to 8% in the case of a credit risk fund.
However, the returns from debt schemes will be lower than what the YTM shows. If we take the direct TER into consideration, the expected range of returns declines to 4.9-6.7%. In the case of regular plans, the expected returns go down further to 4.8-6%.
"In practice, the ballpark return expectation is arrived at by deducting the TER from YTM. For example, if the YTM is 6.5% and the regular plan TER is 1%, then one can expect around 5.5% return. In last few months, the YTMs have improved and some debt schemes are now in a position to beat FDs of top banks," said debt guru Joydeep Sen.
At present, the fixed deposit rates of top banks range between 2.5% to 5.5%. There are also some smaller banks which are offering over 6% return.
Schemes like overnight and liquid which compete with savings bank accounts are also back in their zone. The YTM of liquid funds is now above 5.5% and overnight is starting to deliver 5% return.
|
Fund category |
Average Maturity (years) |
Average YTM |
Highest YTM |
**Avg expense ratio (regular) |
|
Overnight fund |
0 |
5.03 |
5.14 |
0.18 |
|
Liquid fund |
0.09 |
5.61 |
6.07 |
0.3 |
|
Ultra-short duration fund |
0.36 |
6.02 |
6.53 |
0.75 |
|
Low duration fund |
0.86 |
6.29 |
6.84 |
0.9 |
|
Money market fund |
0.35 |
5.96 |
6.42 |
0.5 |
|
Short duration fund |
2.03 |
6.77 |
9 |
1 |
|
Medium term fund |
3.9 |
7.25 |
7.7 |
1.45 |
|
Medium to long duration fund |
6.18 |
7.06 |
7.39 |
1.4 |
|
Long duration fund |
16.7 |
7.57 |
7.7 |
1.5 |
|
Dynamic bond fund |
3.96 |
6.56 |
7.7 |
1.3 |
|
Corporate Bond fund |
2.41 |
6.8 |
7.3 |
0.75 |
|
Credit risk fund |
2.35 |
7.43 |
8.1 |
1.6 |
|
Banking and PSU Fund |
2.42 |
6.65 |
7.4 |
0.75 |
|
Gilt fund |
5.95 |
6.68 |
7.48 |
1 |
** The average expense ratio of regular plans may not be completely accurate (they are an average of only a few schemes) | Source: Value Research
If the net YTM and bank FD rates are compared, debt schemes may not be outright winners in every time frame. However, even those debt schemes that are trailing FDs can be a better investment option if the tax efficiency of debt schemes is brought into the picture.
What if interest rates go up further?
The returns may be even lower if rates go up post investment. However, analysts say that this should not be a cause of concern as the interest rates are already close to the expected peak. In fact, the rate hikes may help certain schemes deliver better returns than the initial YTM.
“If interest rates move, you do not get the exact YTM as indicated on your entry date. We all know that the hardening of rates has a negative impact on bond prices but the interesting thing is that the final returns may actually be higher, thanks to coupon reinvestments at higher yields. This is especially true for roll-down products," said Rahul Jain, Senior VP Research at International Money Matters.
"For example, say an ultra-short term category fund has a YTM of 6% during investment but moves to 6.5% soon after due to a rate hike. As a result, the investor may see sub 5% return for a quarter or two but after that, they will start getting a return closer to the new prevalent YTM. If the investment is into the medium duration rolldown funds then the immediate impact is slightly larger, but end returns will be more than the actual entry YTM," he explained.
