Is it a good time to invest in debt mutual funds?

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Debt-oriented mutual funds witnessed a net inflow of Rs 3,566.39 crore in June, following a net outflow of Rs 44,512.04 crore in May. The segment saw a mixed bag of performance, with money market funds, ultra-short duration funds, short-duration funds, and gilt funds all seeing large net withdrawals, while floater funds, low duration funds, overnight funds, and liquid funds seeing healthy net inflows.

“The improvement in scenario on the fixed income side would have prompted investors to take a calculated risk by allocating some portion of their investments in credit funds. Floater funds continue to receive net positive flows given the limited probability of interest moving down significantly. With a net inflow of Rs 6,318.92 crore, it was the biggest beneficiary in June among the debt-oriented categories,” said Himanshu Srivastava, Associate Director – Manager Research, Morningstar India. 

What should be the investor’s course of action?

Although the net inflows into debt funds have been positive but quite small in the last month, the inflows were deposited into the floating rate funds. There were new fund offers in the floating rate space, which were launched during the last couple of months.

Expert views

“I believe low fixed deposit rates are the reason for debt fund inflows. I would recommend people stick to floating rates or short-term funds for now, especially if this is money for emergencies. One should look at the quality of underlying assets, liquidity, and duration of the fund,” said Shweta Jain, CFP and founder of Investography.

Due to the high CPI and high inflation expectations from higher fuel prices, market experts suggest that investors focus on the short end of the curve where the price risk or interest rate risk is relatively lower than the long end. It is also essential to be watchful of the credit risk aspect of the products invested.

“Debt being an important asset class for parking surplus funds as well as for longer-term investment, we may see inflows into debt in the coming months. The inflows may likely be more into very short term and short-term funds due to the likely pressure on the long-term rates resulting from the government borrowings,” said Joseph Thomas, Head of Research, Emkay Wealth Management.