This article is very helpful for investors who are interested in debt securities as an investment avenue. In this article, we will be discussing which debt funds are good for the investors especially for a shorter duration amid the current interest rate scenario. So, let’s get started.
Current Inflation Status:
- Currently, the inflationary situation in the domestic economy, as well as the global economy, is on an upward trajectory. The high Inflationary condition is one of the major reasons behind the fall in the US Markets in the recent past.
- Due to similar reasons, the high inflation situation is impacting and might impact further the Indian Stock Market. Some of the reasons are:
i) Crude Oil:
- India is one of the largest importers of Crude Oil and currently the price of crude oil is hovering around the level of $100 per barrel which is at the 6-year high level.
- These high levels of Crude Oil prices will certainly impact the raw material prices, and on other factors as well.
ii) Higher than Expected Government Borrowing in Budget 2022:
- In Budget 2022, the Government stated that it will raise a very hefty amount in the financial year 2023.
- The Gross Borrowing amount is Rs. 14.1 Trillion and Net Borrowing is Rs. 11.6 Trillion. The announcement of this borrowing amount by the government for FY23 was higher than expected.
- The impact of such huge borrowings will be on rising interest rates due to the low supply of money.
iii) Global Inflation:
- There is a widespread inflationary situation across the globe wherein for instance the United States of America is witnessing the 40-year high level of the inflationary situation.
- Due to global inflation, which will directly affect the commodity prices globally and hence the raw materials which are being impacted by India will also go through these hard times.
iv) No Change in Capital Gains Tax:
- The Budget did not offer any roadmap for changing Capital Gains Tax provisions for facilitating the inclusion of Domestic Bonds in the Global Bond Index.
v) Continuation of Accommodative Stance by RBI:
- RBI in its recent policy of February 2022 has continued its accommodative stance where the Central Bank of India has chosen to continue with its thrust on supporting Economic Recovery while ignoring the Global Monetary Tightening and Downplaying situation.
- The market was expecting a roadmap of rising interest rate scenarios and to step back from its accommodative stance.
Which Debt Funds to Buy?
- In the last 1 year, Liquid Fund has given returns of just 3%. While Dynamic and Corporate Bonds have yielded returns of 4%-4.5% respectively in the same period.
- Gilt Funds which is considered the safest debt fund where there is no credit risk involved has generated the lowest returns of less than 3% in the last year.
- Long Duration Funds yields higher returns in the downside interest rate scenario and performs oppositely in the case of a rise in interest rates.
- Among all these, Floater Funds have generated returns on a higher mark of 4.5% over other debt funds.
What Should Investors Do?
Looking at the current economic condition where currently Inflation is looking like a major concern, debt investors need to be very cautious with regards to selecting debt funds as there are possible expectations of a rise in interest rates. With concluding the above discussions about inflation and performances of various debt funds, floater funds, money market, low, and short duration are some of the good categories for investing for the short to medium time frame.
Disclaimer: The information here is provided for reference purposes only and should not be misconstrued as investment advice. Under no circumstances does this information represent are commendation to buy or sell stocks or MF.