| January 25
Time to book profits in debt funds in 2021? Find out
In a falling interest rate scenario, bond prices of existing fixed-income securities tend to move up. The NAVs of debt mutual funds move up, thus generating gains for the debt fund investors. No wonder, the long duration debt funds have on average delivered nearly 12 per cent over the last 12 months. But, will the scenario continue or change in 2021 and should debt fund investors book profits?
Interest rates are at a near all-time low. With the arrival of Covid Vaccine, the probability of rates going up in the coming years is more, as business conditions will improve further and give RBI a reason to increase interest rates stagnantly. For all those people who have the risk appetite, it is better to book profits and allocate the balance to other asset classes like gold, hybrid funds,” says Nitin Shahi, Executive Director of Findoc Financial Services Group.
RBI had cut the repo rate by 115 basis points ( 1.15 per cent) in the previous year but with inflation shooting up lately, the status quo was maintained at the end of 2020. The global interest rates are at a record low and the central banks of various countries have been injecting liquidity to keep the global economy moving. In India too, the RBI has been providing the required support and kept the rate of interest low in the economy.
Unless inflation comes down to a range comfortable to RBI, the probability of cutting rates in 2021 remains elusive. Subramanya SV, co-founder & CEO at Fisdom suggests, “Investments in long duration debt funds (including gilt funds) have had a good run last year but investors must be wary of viewing past performance as indicative of future performance. For long-duration debt fund investors, it does make sense to book profits and trim the duration exposure to a ballpark of two years.”
However, the reason to redeem and exit from debt funds should not be based entirely on the performance of the asset-class. For goals which are about 3 years away, the investment in debt funds works the best in generating a high tax-effective return. “Most of the investors invest in debt funds from risk protection perspective and hence they should continue to hold with their debt investment. If interest rate start increasing, which may not happen in immediate future then look to move to long term debt instruments. In the meantime, it is better to remain invested in short and medium term instruments including short term bank fixed deposits,” says Harshad Chetanwala, Co-Founder, MyWealthGrowth.com.
If you are still looking to gain from the debt fund allocation, here’s what Subramanya SV suggests, “Another useful approach would be to invest in funds adopting a roll down strategy while ensuring that the average maturity of the fund approximately matches the investment horizon. It is imperative that investors invest in portfolios having the highest exposures to sovereign and AAA-rated papers. Low duration, short term debt and banking & PSU debt funds are good categories to look at today.”