Debt mutual funds in India saw healthy fund inflows last month, according to the data released by the Association of Mutual Funds of India (AMFI). Fixed income funds cumulatively received a net of Rs 49,164.29 crore in August 2022, jumping a massive 897% over their previous collection of Rs 4,930.08 crore in July. Out of these, liquid funds amassed the most value, worth Rs 50,095.82 crore.
This also marks a serious turnaround from the Rs 70,213 crore worth of outflows that debt mutual funds witnessed in the second quarter of 2022. For the uninitiated, debt funds usually invest in relatively risk-free instruments compared to equity, like corporate and government bonds, debt securities, and more.
Equity funds, however, registered a downfall, collecting Rs 6,119.98 crore last month, dipping slightly from Rs 8,898.25 crore, which had flown in last month. Notably, July and August have been tumultuous months for global markets, with major economies like the UK and the US tackling burgeoning, record inflation pressures.
Central banks across the world have been turning up the heat on interest rates, which has diluted and directed investor sentiment away from high-risk equities and emerging markets towards more stable and conservative instruments like debt.
To put this in perspective, major global indices like S&P 500 and NASDAQ have been in the red over the last month, down by 3.39% and 5.78% respectively. Perhaps in line, thematic or sectoral funds in India saw maximum outflows in the equities category, with withdrawals worth Rs 1,266.67 crore in August.
As Shifali Satsangee, Founder and CEO of Agra-based personal finance advisory Funds Veda puts it, “Of late, we have witnessed an interest rate cycle reversal against the backdrop of high inflation numbers coming in and also the rolling back of Covid-related fiscal stimulus. We are expecting a few more rate hikes going forward. Thereby, it would be prudent to park long-term money into Target Maturity products, with a roll-down strategy.
“In fact, we have also seen a significant upside in yields across the yield curve in the last couple of months. Aggressive rate hikes by the Central bank have naturally made debt funds an attractive investment segment. While this rate transmission may take months to reflect in the system, debt funds will certainly remain attractive in the coming months.”
‘Moderate return expectations in debt funds’
Viral Bhatt, who runs Money Mantra, a personal finance advisory in Mumbai, says not to invest heavily in debt funds. “Debt mutual funds try to optimize returns by investing across all classes of debt securities like bonds, commercial papers, and more. This allows debt funds to earn decent albeit very predictable returns. That also makes them safe avenues for conservative investors, suitable for people who want to have an investment horizon between 1-5 years,” Bhatt says.
Satsangee agrees, “A point to note is that one should have moderate return expectations in debt funds. These could be ideal for investors who are in higher tax brackets, due to the tax efficiency that they offer because of their long-term capital gains tax treatment with indexation. The low expense ratios of these funds make them attractive”.
But despite their safety, they are fraught with risks, too. “Investors would be exposed to mark to market risks in the interim, as the underlying securities could see changes in capital values, due to interest rate risk in the short term. But if investors hold these instruments until maturity, the interest rate risk is mitigated”.
If you’re someone who’s not willing to take many risks, play it safe, and trade stability with returns, debt funds are for you. Nema Chahaya Buch, who heads Wishing Tree Financial Advisory says, “If the priority is to protect principal investment over new returns, debt funds should be preferred. Likewise, if you’re in a job/profession that has very high-income fluctuations, then it makes sense to have more debt investment to supplement those uncertainties. People aged 50 or more should also ideally have more debt as protection for their portfolio”.
To determine the quantum of debt investments in your portfolio, there’s a thumb rule, says financial planner Sanjeev Dawar. “For ease of implementation, invest in debt mutual fund in the same proportion as your age. So, for a 30-year-old young person, debt should be 30% of the portfolio; for a 50-year-old it can be 50%. This approach brings stability to the portfolio by protecting it from market volatility,” he notes.
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