With the interest rate cut cycle nearing its end, several debt fund managers are shifting their focus towards interest income rather than betting on duration in anticipation of capital gains.
'They are ideal for short-term financial goals like children's education or a down payment for a house.' 'They are also useful for transitional savings, such as during job switches or while starting a business.'
Actively managed debt funds with the flexibility to go long on duration made a strong comeback on the returns chart in 2023, thanks to softening bond yields. The average one-year returns of floater, long-duration, gilt, and dynamic bond funds, which ranged between 2.3 per cent and 4.5 per cent at the end of 2022, now stand at over 7.2 per cent, with some schemes delivering over 8.5 per cent, according to data from Value Research. Debt fund returns are inversely related to yields of underlying investments, meaning a decline in yields is positive for funds.
'If rate cuts happen, bond yields will come down and investors will make mark-to-market capital gains on them.'
Besides high portfolio yield, investors may enjoy capital gains in debt funds in 2023 as bonds rally in anticipation of rate cuts.
Domestic fund houses are of the view that the US Fed's status quo stance on rates is a positive indication for RBI to lower its lending rates.
Improved credit profile may make you eligible to transfer your existing home loan to another lender at a much lower rate.
This works only for longer-tenured ones such as income funds, as the element of interest rate risk is reduced.
Go for high quality and low-to-medium-duration funds in your debt portfolio
Debt fund managers think the Reserve Bank governor might at best go for one rate cut in April.
'Everyone is still trying to understand the quantum of impact demonetisation will have on the economy.'
Single window clearances for realty must.
The forthcoming budget is an excellent opportunity for the Government to fulfill its promise of high economic growth.
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