Hardening yields to buoy debt MFs, experts recommend short-term maturities

Given the risk of high inflation, bond yields can harden further. However, current rates are attractive and provide good scope to start nibbling, say experts

The yield on the 10-year government security dipped on Wednesday even as the Reserve Bank of India (RBI) hiked the repo rate by 50 basis points to 4.90 per cent. In the earlier trading session, the 10-year g-sec had ended at a 40-month high of 7.518 per cent.

Experts say given the risk of high inflation, bond yields can harden further. However, the current rates are attractive and provide a good opportunity to start nibbling.

They say investors can look at investing in funds having maturity of 2-3 years and can also invest in dynamic bond funds, suggests fund managers.

Sandeep Bagla, CEO, TRUST Mutual Fund says, “As inflation is likely to persist, longer bonds are at risk with yields likely to rise up. The supply of g-secs also is quite humongous and hence funds up to 2–3-year maturity will give good returns to the patient debt investors.”

On Wednesday, the 10-year G-Sec yields ended the day at 7.49 per cent. In the last three months, yields have gone up by 60 basis points due to the inflation concerns and rise on crude prices.
 

Pankaj Pathak, fund manager-fixed income, Quantum AMC says, “The return potential of liquid and debt funds has improved significantly after the sharp jump in bond yields over the last six months. The gap between the bank savings rates and liquid fund returns will widen and remain attractive for your surplus funds. Investors with a short holding period and low-risk appetite should stick to categories like liquid funds of good credit quality portfolios.”

Compared to funds which are long duration in nature, short duration funds and liquid funds have managed to give returns in excess of 3 per cent in the last one year.

Data from Value Research shows that long duration funds have on an average given negative returns of 2.74 per cent in the last three months. While gilt with 10-year constant duration and medium to long duration funds are down by 2.57 per cent and 1.68 per cent respectively.

Some believe there is value even in the 5-10-year segment of the yield curve.

“Investors with long-term investment horizons should consider target maturity bond ETF or bond index funds maturing between 5- to 10-year depending on their comfort. Risk-reward ratio is in favour of investors who remain invested till the maturity of these bond ETFs. Investors should consider investing in three to four tranches with a view to get fully invested by Dec 2022 in our view,” said Edelweiss AMC in its note.