Listen to this article
What is your near term outlook on the debt market? What will be the key triggers from here on?
In near term, yields should trade in the range of 6.95% to 7.20%. Yield movement will depend on Fed comments which is the main trigger. Fed has hiked the rates by 25 bps in May 2023 and the tone indicates that probably this was the peak. Also, yields have declined globally.
On the domestic front, the headline inflation numbers will give further direction to the market along with upcoming monsoon expectations. As food prices decline and base effect is taking over, the headline inflation is expected to decline. Monsoon is unpredictable but by July/August if the spatial distribution is normal, it will help.
Dynamic interest rate scenario and the removal of LTCG appear to have made investors more inclined towards other hybrid products. How can MFDs tackle this?
Indexation was a cherry on cake but debt will continue to be a part of asset allocation. Any individual or corporate will invest based on risk appetite. Hence investments in fixed income will continue based on asset allocation and risk appetite instead of tax benefit.
As hybrid products will have equity as a percentage of portfolio, it might have more volatility which might not be acceptable to debt investors. However, arbitrage could be a better option.
Debt funds have not performed well over the last 3-year period. Many categories of debt funds have delivered returns less than inflation. Why do you think MFDs should continue to recommend debt funds to their clients and justify its worth compared to FDs?
In rising interest rate scenario, yields rise and hence, the price of bonds falls. All asset classes rise and fall based on macro scenarios. In the last one year yields have inched upwards due to rate hikes. Hence, the returns are lower.
However, as yields have started declining after the peak of around 7.60%, investors may gain via capital appreciation.
Which fund categories of debt funds should MFDs recommend in the current scenario?
Yield curve is almost flat across the category. Investment may be made on the basis of investment horizon and risk appetite.
How can MFDs make debt funds simpler to their clients? Tell us at least two things that they can do to simplify narrative around debt funds?
The one thing I believe will have a strong impact on investors is knowledge. Some of the MFDs need to upgrade their understanding about debt mutual funds. Once they do that, they will be able to comprehend the debt products better to their clients.
The other thing which they can do is look at debt products more as a tool rather than a return generating product. This can change the perspective about debt products.
Also, instead of credit risk products, MFDs can focus more on MF schemes which have a better portfolio rather than focusing on high YTM. They may use this thumb rule - modified duration of the MF scheme must be less than or equal to the investment horizon of the client. This may protect the client from interest rate risk.
