With bond yields rising! What should debt fund investors do?
5paisa Research Team
4th February 2022 - 01:26 pm
Interest rates seem to be rising consistently since July 2020 making debt portfolios turn red. Read on to find out which debt funds to consider for the time to come.
If you go back to the year 2018, the interest rates had started falling and they continued to fall until July 2020. This was a rewarding period for most of the debt funds especially long duration and gilt funds that clocked double-digit returns of 17% and 14%, respectively. As you know in the falling interest rate scenario, bond prices rise and this helps debt funds earn returns and vice versa.
|
Debt Category |
Returns (%) |
|
Long Duration |
17.06 |
|
Gilt - 10 Year Constant Duration |
15.82 |
|
Gilt |
14.09 |
|
Banking & PSU Debt |
10.96 |
|
Medium to Long Duration |
10.68 |
|
Corporate Bond |
10.37 |
|
Dynamic Bond |
10.21 |
|
Floater |
9.12 |
|
Money Market |
8.17 |
|
Short Duration |
7.54 |
|
Ultra-Short Duration |
6.83 |
|
Liquid |
6.08 |
|
Medium Duration |
5.46 |
|
Overnight |
5.28 |
|
Low Duration |
4.14 |
|
Credit Risk |
-0.85 |
|
Returns Period: September 2018 to July 2020 |
|
Therefore, the debt fund earned returns in the above-mentioned period because it was a falling interest rate scenario. However, as the interest starts to rise when the central bank sucks excess liquidity, the bond yields start rising and this is not good for debt funds especially those who are at the higher end of the yield curve.
|
Debt Category |
Returns (%) |
|
Credit Risk |
9.66 |
|
Low Duration |
6.80 |
|
Medium Duration |
6.13 |
|
Short Duration |
5.83 |
|
Floater |
5.32 |
|
Corporate Bond |
4.95 |
|
Dynamic Bond |
4.74 |
|
Banking & PSU Debt |
4.65 |
|
Ultra-Short Duration |
4.37 |
|
Medium to Long Duration |
4.02 |
|
Money Market |
3.90 |
|
Liquid |
3.27 |
|
Overnight |
3.17 |
|
Gilt |
3.11 |
|
Long Duration |
2.96 |
|
Gilt - 10 Year Constant Duration |
1.52 |
|
Returns Period: July 2020 to February 2022 |
|
As you can see, in the second part from July 2020 till date, the table has turned around and this time categories such as credit risk, low duration, medium duration and short duration are doing well. Moreover, in time to come the Reserve Bank of India (RBI) is likely to hike the key policy rates which in turn would lead to rise in bond yields. Therefore, investors should have a well-balanced debt portfolio by investing in short duration funds, corporate bond funds, low duration funds and floater funds.
Tanushree Jaiswal