Debt mutual fund investors: Here’s what’s in store for you

Debt mutual funds: As a debt mutual fund investor, it is imperative to know that bond yield indicates changes in prices of the bonds

Debt mutual fund investors: Here's what's in store for you
Mutual funds are classified according to their structure, that is, whether they are open-ended or close-ended.

The secondary market yields of longer duration government and corporate debt securities eased in May, according to a CARE Ratings report. The average 10-year benchmark GSec yields in May moderated to a four-month low of 5.99%, i.e. 7 basis points lower than month ago.

The decline in government securities (G-Sec) yields was driven by the Reserve Bank of India (RBI) purchase of government securities. The report said the fall in yield of corporate bonds can be attributed to surplus liquidity in the banking system and demand from mutual funds.

“Decline in the benchmark bond yields despite the demand -supply mismatch can be attributed to RBI’s bond buying from the secondary markets as a part of its regular open market operations along with the recently launched G-Sec acquisition or G-SAP programme. Concerns over the likelihood of additional market borrowings by the government to tide over the financial strain caused by the second wave of the pandemic and the underlying inflationary concerns with the firming of global commodity prices limited the fall in yields,” the report noted.

Mint Street action

RBI’s actions will remain the key driver for the Indian bond market. It has already committed to purchase G-Sec worth Rs. 1.2 trillion in Q2 FY22. As per the Quantum AMC report: Inflection Point, given the extraordinarily large size of government’s borrowing requirement, the RBI will have to continue its market interventions well into the future to maintain calm in financial markets. The overall market expectation is that the RBI may buy around Rs 4.0-4.5 trillion in FY22. This may be supportive for the market over coming months.

What does it mean for investors?

As debt mutual fund investor, it is imperative to know that bond yield indicates changes in prices of the bonds. The decline in yield shows that debt mutual fund investors’ returns may go up.

According to fund managers, the bond yields have already bottomed out in this cycle and is expected to move higher over the next 1-2 years.

“We have been saying this since the start of the year that, investors should acknowledge that the best of bond market rally is now behind us,” cautions Pankaj Pathak – Fund Manager – Fixed Income, Quantum Mutual Fund. “At this time, it would be prudent to lower the return expectations from fixed income products– as money market yields, fixed deposits rates will remain low and potential capital gains from long bond funds will be muted,” he further adds. Conservative investors can look for investing in categories like liquid fund where impact of interest rate rise would be favourable. However, while selecting a liquid fund, investor should be cautious of the credit quality and liquidity of the underlying portfolio.

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