Why ULIP mis-selling has become rampant ?
Why is there so much mis-selling of ULIP? How to avoid this mis-selling? Who should take ULIP?
Bond prices and interest rates are inversely related to each other. For instance, when interest rates go up bond prices fall and vice versa, the impact of bond prices is reflected in the Net Asset Value (NAV) of mutual funds. As per the market experts, therefore in the prevailing scenario, it is less risky to invest in short-duration debt mutual funds if interest rates are expected to go up.
Following the outbreak of the Covid-19 pandemic last year, the yields at the long end were mostly anchored in the band of 5.90% – 6.25%. Despite the record fiscal deficit and government borrowing, active presence of RBI, being a large buyer of bonds in the secondary market helped to keep yields well anchored.
“Last year the Interest rates were reduced aggressively due to covid pandemic, therefore it helped longer duration debt fund post double-digit returns, however shorter duration funds took a hit,” points out Omkeshwar Singh, Head of Rank MF, Samco Group.
That said, the second wave continued demand for fresh stimulus and some worries on the macro front from persistent and sticky inflation around the 5% level and record-high crude prices. These factors are expected to keep the long end of the yield curve under pressure.
Current Mutual Fund Scenario
As per the Association of Mutual Funds in India (AMFI) data, the debt-oriented categories witnessed significant net outflows of Rs 44,512.04 crores for the month of May 2021. This outflow was primarily due to huge net outflows of Rs 45,447.36 crores from the Liquid Fund category and a net outflow of Rs 11,573.01 crores from the Overnight Fund categories.
On the positive side funds at the shorter end of the curve including Low Duration, Money Market and Ultra Short Duration witnessed good net positive flows during the month of May. “This indicates that investors preferred fixed-income funds at the shorter end of the curve, especially in categories with short duration between 3 months to 1 year, in line with the prevailing interest rate scenario,” says Himanshu Srivastava, Associate Director – Manager Research, Morningstar India.
What should be the course of investors going forward?
The investment in debt funds should be aligned to the objective of the investors and there are multiple categories available with varying credit risk and interest rate risk combination and investors should choose accordingly.
Mutual fund investors can actively consider choices ranging from the Short Duration fund, the Corporate Bond fund and/or Banking & PSU categories to meet their investment objectives.
“Banking & PSU funds and Corporate Bond funds should be considered as there have lower credit risk and moderate interest rate risks,” concurs Omkeshwar Singh, Head of Rank MF, Samco Group.
Further shorter-term debt mutual fund schemes that pre-dominantly have durations in the 2-4 year range have outperformed the longer products in the last 12 months. However, for the investors who have a higher appetite to handle volatility, Dynamic bond funds could also offer a good choice.
“In the longer term 5 and 10 year horizons, dynamic bond funds have earned higher returns compared to shorter term products such as Short duration and Banking PSU category,” says Kumaresh Ramakrishnan, CIO-Fixed Income, PGIM India Mutual Fund.