Time to count profits in debt funds in 2021? Discover
Most investors invest in debt funds with a view to protecting against risk and therefore must continue to maintain their investment in debt.
In a lower interest rate scenario, bond prices of existing fixed income securities tend to rise. Debt mutual fund NAVs are increasing, generating gains for debt fund investors. No wonder long-term debt funds have generated an average of nearly 12% over the past 12 months. But will the scenario continue or change in 2021 and should debt fund investors record profits?
“Interest rates are at historic lows. With the onset of Covid Vaccine, the likelihood of rates rising in the coming years is greater as trading conditions will improve further and give RBI a reason to stagnately raise interest rates. For all those people who have the appetite for risk, 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%) the previous year, but with inflation soaring lately, the status quo was maintained at the end of 2020. Global interest is at an all-time high and central banks in various countries have injected liquidity to keep the global economy moving. In India too, the RBI provided the necessary support and kept the interest rate low in the economy.
Unless inflation drops into a comfortable range for RBI, the likelihood of a rate cut in 2021 remains elusive. Subramanya SV, co-founder and CEO of Fisdom, suggests: “Investments in long-term debt funds (including gilt funds) have done well over the past year, but investors should be wary of looking at past performance. as indicative of future performance. For investors in long-term debt funds, it makes sense to book earnings and reduce duration exposure to an approximate two-year range.
However, the reason for redemption and exit from debt funds should not be based entirely on the performance of the asset class. For goals that are around 3 years away, investing in loan funds is the most effective way to generate a high, tax-efficient return. “Most investors invest in debt funds from a risk protection perspective and therefore should continue to hold their investment in debt. If interest rates start to rise, which may not happen in the immediate future, consider switching to long-term debt instruments. In the meantime, it’s best to stay invested in short- to medium-term instruments, including short-term fixed bank deposits,” says Harshad Chetanwala, co-founder of MyWealthGrowth.com.
If you’re still looking to profit from debt fund allocation, here’s what Subramanya SV suggests: “Another useful approach would be to invest in funds that adopt a deployment strategy while ensuring that the average maturity roughly matches the investment horizon. It is imperative that investors invest in portfolios with the most exposure to sovereign and AAA-rated paper. Low-duration debt, short-term debt, and bank and PSU debt funds are good categories to look at today.