Debt MFs see negative returns in the last 1-3 months!
Last updated: 01 Mar, 2021 | 01:10 pm
Debt mutual funds have posted losses across most categories in the last 1-3 months, on the back of rise in yields. Here are a few highlights:
- Due to their higher sensitivity to yield changes, longer duration funds have been the worst performers in this period. Duration is the measure of sensitivity of a bond’s price with respect to changes in yields. Bond price and rates move in the opposite directions i.e. if rates increases, bond prices decrease and vice versa.
- India’s 10-year benchmark bond touched 6.20% last week. The average increase in government securities yields across 3, 5, and 10 years has been around 31 basis points since the start of Union Budget on February 1st. Corporate bonds rated ‘AAA’ and SDL spreads have jumped by 25-41 basis points during this period.
- Arbitrage Funds, Ultra-Short Duration and Low Duration Funds have posted positive returns in the period, due to lower sensitivity to changes in yields.
- Higher risk Credit Risk funds have given negative returns acoss tenures, (except 1 week).
The table below shows Category Average returns of debt funds across various tenures.
- Stick to high-quality AAA-rated low duration funds and bonds. Prefer safety over high yields in this volatile market. In fixed income securities, high risk does not mean higher returns.
- There is a significant tax advantage in holding a debt fund for more than 3 years. For a more than 3-year investment horizon, an investor should prefer short duration (duration < 3) fixed income instruments over long duration. Consider your tax consequences before switching from longer duration to shorter duration funds.
- The interest rates are expected to bottom out and move higher over the next 1-2 years. Shorter duration funds are likely to outperform in this scenario, given their lower sensitivity to interest rate changes as compared to long-duration funds.