Debt funds not as bad as you think
The fiasco of IL&FS almost 7-8 months back was termed as ‘Lehman Brother’ moment of India, which had the potential of destabilising the entire financial sector be it equity or debt. This was followed by some more debacles such as Zee and DHFL. This impacted the debt market severely and many of the Non-Banking Financial Sector (NBFC) saw their fundraising capacity cripple.This has impacted the performance of various funds, especially debt funds who were holding papers issued by these companies.We are not yet out of the woods and going forward, we may see some more skeleton coming out of the closet.
Nonetheless, it will be unwise to paint entire debt fund with the same brush. Some category of debt funds has outperformed various categories of equity-dedicated funds. For example, Gilt and Long Duration bonds have generated returns in double-digit in last one year. If the banking sector would have not moved the way it has moved in the last three months, Gilt funds would have been the best performing funds last year.
One of the reasons for their better performance is falling bond yields. There is an inverse relation between bond yield and bond prices. India’s benchmark 10 years extended Bond yields fell for the sixth consecutive session ending May 29, 2019, its the biggest losing streak since March 2016. It is currently near 18-month high, following a fall in the global crude oil prices and the slide in the US treasury yields. The yield on the benchmark note was at 7.12 per cent, a level last seen on December 8, 2017.
Going ahead, as inflation and growth rates have dropped recently; we may see RBI taking assertive action on the rate front in its next meeting on June 6. Therefore, we believe that these categories will continue to do well. Moreover, there are ways such as side pocketing which these the fund houses can use to insulate new investors.
Following table shows that the best return in the last one year is provided mainly by debt funds.
Best Performing Category in last one year
