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Is your debt mutual fund investments safe!

Author: Debasis Mohapatro/Friday, December 29, 2017/Categories: Mutual Funds

Is your debt mutual fund investments safe!

Mumbai: With Indian benchmark 10-year government bond yield touching 17-year high, investments in bond funds of mutual fund houses are likely to give low returns in the coming months. Especially, return from long-term bond funds may dip in the near future.

Bond yield and prices are inversely proportional. When bond yield goes up, prices go down which affects return of bond funds adversely.

“In the current scenario, returns from debt funds are likely to be subdued as yield curve is likely to maintain the current trend. With higher probability of US Federal Reserve hiking interest rates in coming months and increasing fiscal gap in India, yields are less likely to ease in coming months,” chief executive officer of Quantum Mutual Fund, Jimmy Patel told the Finapolis.

Notably, the 10-year benchmark bond yield touched 17-year high of 7.31% this week. This was majorly attributed to concerns over increasing fiscal gap after GST collections fell to lower-than-expected levels of Rs 80,808 crore for the month of November.

“Fundamentally, nothing appears to be strong. From job creation to rising bad loan, Indian economy is facing a lot of headwinds. There is also no meaningful revival in the private investment,” Patel said.

The yield curve will take direction from upcoming budgetary announcements, he added.

Meanwhile, another analyst also echoed similar sentiments about bond yields but added that short-term debt mutual fund schemes are better placed than long-term debt funds in the present time.

“Investing in short-term and liquid mutual funds will give better return than long-term debt funds due to the surging yields of benchmark bonds,” Rohit Grover, Certified Financial Planner at Mumbai-based advisory firm, MoneyFrog said.

Investors with less than 1 year investment horizon should look at liquid mutual funds as returns are better than bank fixed deposits, he said. Meanwhile, individuals with more than 1-year investment horizon should invest in short-term debt funds.

On an average, short-term debt funds have given close to 9% return in the last one year.

“With inflation likely to rise further, it is unlikely that long-term bond yields will ease in coming months. Therefore, debt funds with short tenure should be preferred over longer ones,” Grover added.  

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