Negative Returns In Debt Funds – What Should Be Your Investment Strategy Now?

Changing asset allocation can be disastrous for investors as all asset classes have their ups and downs.

Debt mutual funds are considered relatively less volatile than equity mutual funds. While this may be true, especially over a long period of time, the likelihood of negative returns cannot be ruled out in the shorter term. There are approximately 16 different categories of mutual funds based largely on the maturity profile of their underlying securities. And, the average performance of most debt funds in 2021 has been negative to date. Some categories of debt funds are also in negative territory over the 3 month period. “Duration products give negative returns, funds that have a maturity of more than 2 years or more. Short term and above category gives negative returns, ”says Murthy Nagarajan, head of fixed income, Tata Mutual Fund.

There is no exposure to equities in debt funds and the underlying securities include a mix of money market instruments, private sector bonds, government securities, etc. risk funds. So what could be the reason for the sudden drop in the net asset value of debt funds that investors are seeing?

The impending effect of rising inflation could be the reason most believe. As growth returns not only in India but around the world, inflation is on the rise. “Globally, yields have increased due to rising commodity prices. The market is worried this could cause inflation to rise in the coming years, forcing central banks to raise interest rates, ”Nagarajan said.

Rising yields (or falling bond prices) occur when bond investors abandon their existing bond holdings with the expectation of high interest rates on future bonds. For growth, the government needs funds and often resorts to borrowing in the market to cover the deficit. “The increase in the government’s borrowing program is the main reason for the upward movement in yields,” Nagarajan adds.

In particular, the NAVs of the Gilt funds and the “Gilt funds with a constant duration of 10 years” are the two categories which have fallen the most in the short term. Nagarajan said, “Over the past month, ten-year bond yields have increased by 30 basis points, 2-year to 5-year segment saw yields rise 50 to 80 basis points, segment yields 15 years have moved up 40 basis points. The benchmark of the Gilt fund is 11 years and market participants, if they hold positions, may have suffered losses. As the yield curve goes up on the maturities, we are seeing this sharp drop in Gilt funds. “

Strategy for investors

So what should investors do now? “We advise investors to stick to the asset allocation framework and to be patient in controlling the volatility of different asset classes. Changing asset allocation can be disastrous for investors as all asset classes have their ups and downs, ”Nagarajan suggests.

However, if the rise in yields continues in the near future, it may be better for investors to move their funds to the debt fund category. “Investors who need money in the next 6 months to a year may look to buy back the high duration products and invest in the low duration products. And, for investors looking to put funds into debt funds to meet targets in about three years, Nagarajan said, “The low duration category and the money market category could be the categories in which new investors may consider investing. As we expect interest rates to rise, we do not recommend long duration funds. Investors can only invest in funds that have a good portfolio and avoid funds taking credit calls.

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