Reset your return expectations from debt mutual funds, say fund managers

Bond markets reacted negatively to the massive fiscal deficit which got here as a shock within the Price range 2021. Finance Minister Nirmala Sitharaman in her Price range speech introduced Rs 12 lakh crore of central authorities's gross borrowing in FY22 and a further Rs 80,000 crore in remainder of FY21. Reacting to the large borrowings, the benchmark 10-year GSec yields breached the 6 per cent degree publish the Price range bulletins for the primary time since September 2020. Mutual fund managers advise debt fund buyers to decrease their return expectations from the debt schemes hereon.

"From the bond market's perspective the Budget had more negatives than positives. Increase in fiscal deficit in the current fiscal year to 9.5 per cent of GDP and target of 6.8 per cent for FY22 was a surprise. This, along with the extended fiscal consolidation roadmap indicate that the bond market will face heavy supply pressure not just in this year but over many years, says Pankaj Pathak, Fund Manager - Fixed Income, Quantum Mutual Fund.

"Traders ought to decrease their returns expectations from fastened earnings funds and may comply with a conservative method whereas selecting fastened earnings merchandise. Rates of interest are more likely to transfer greater in coming years," adds Pathak.

Bond yields and prices move in opposite directions. The NAV of the debt mutual fund schemes fall when the yields rise. The rising yields will have an adverse impact on debt schemes with a higher duration. Long duration and gilt fund categories which topped the charts across the debt mutual fund categories in the year 2020 with double-digit returns, may bear the brunt now. These categories on an average delivered around 12 per cent and 13 per cent returns last year, respectively. Investors should not expect similar returns from the long duration debt fund categories. Fund managers advise investors to stick to shorter duration schemes for now.

"We advise the debt buyers to look into the schemes having investments largely into 2 to 4 years maturity as of now and anticipate RBI's OMO steering earlier than wanting on the longer tenor maturity," says Vikas Garg, Head - Fixed Income, Invesco Mutual Fund.

Short duration debt funds in the last one year gave an average returns of 7.5 per cent, low duration funds gave 5.75 per cent returns and medium duration schemes (6.04 per cent)  in the same time period.

"FY21 report excessive G-Sec borrowings have been largely supported by RBI's interventions in varied methods and FY22 would additionally require a continued assist from RBI particularly because the credit score development picks up. Any amiss on RBI's half can harden the rates of interest in FY22 which will be counter-productive in supporting the nascent financial development," provides Garg.

Additionally Learn: MPC meet: What RBI's coverage stance means for debt mutual fund buyers