India

Debt funds have been out of favour for close to two years now.

But with equity markets turning volatile, yields rising, and the rate hike cycle forecasted to near its end debt funds may again draw investors’ attention. The yield-to-maturity (YTM) of debt funds have been rising steadily for almost a year.

At the end of January, the YTMs of popular medium-term debt schemes like corporate bond funds and short-duration funds touched an average of 7.5 per cent, which is the highest since Covid’s outbreak. The persistent volatility in the equity market and poor equity fund returns in the last one year are also working in favour of debt funds, according to investment advisors.

The benchmark Nifty50 is down 3.5 year-to-date and is even below levels seen during October 2021. “Money has been flowing into debt schemes from retail and HNI investors, despite rising competition from bank fixed deposits,” said D P Singh, deputy managing director and chief business officer, SBI MF. Major banks have raised fixed deposit (FD) rates to around 7 per cent, which is similar to what medium-horizon debt funds are offering post expenses.

However, debt funds have an upper hand in taxation.

Long-term investment in debt funds is taxed at 20 per cent with indexation benefits, while gains from bank FDs are taxed as per the investor’s tax slab. Investment advisors and MF distributors say investors are finally showing interest in debt funds after staying away for almost two years. “HNI investors have started to put money into gilt funds and long maturity roll-down funds.

This month, a lot of my clients have shown interest in deploying money in longer horizon funds as they expect the rate hike cycle to end soon,” said Mohit Gang, co-founder and CEO, Moneyfront. According to Kirtan Shah, founder of Credence Wealth Advisors, investors have an added incentive to invest in debt funds right now.

“Anyone investing now will get an extra year of indexation benefit as this financial year will also be taken into account,” he said. However, the rising investor interest is unlikely to change the fortune of debt funds.

While retail and HNI investors are once again warming up to debt schemes, the flow of investments from institutions may continue to run dry. “Corporates are in need of funds for capex and other expenditure, as evident from the growth in credit demand.

This is why the industry is not receiving much inflows from the institutional side,” Singh said. Sandeep Bagla, CEO of Trust MF, believes strong inflows into debt funds will come only after the rate cut expectations start to build in.

“We will have to wait for that.

The US economy is faring well and if the inflation persists, the rates can even go up in the US.

In India too, there are no expectations of rate cuts anytime soon,” he said.





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