Should You Go Aggressive On Debt MFs?
One of the basic questions in the minds of debt mutual fund investors now is: what will be a suitable investment strategy to adopt after the recent cut in key policy rates by the RBI? This is the second consecutive rate cut by the apex bank in the last few months. A soft interest rate environment benefits debt mutual funds in general, especially the long duration debt mutual funds. This is because as interest rate goes down, the demand for bonds that pay higher rates go up, which means higher NAVs for funds holding such bonds.
The last couple of years were not good enough for debt funds in terms of returns; however, the recent rate cut has created a new hope for debt MF investors. With the subdued growth outlook in India as well as globally and the likelihood of moderate inflation, the experts are expecting further rate cuts going ahead.
Does it mean that the time is ripe to start allocating major part of your investment towards debt MFs? The latest AMFI data shows that investors are already making their moves. Income funds received net inflows of Rs 13,856 crore in March 2019, compared to outflows of more than Rs 1 lakh crore in FY19.
Our advice is not to go aggressive as the RBI's policy on interest rates is just one of the factors that impacts the performance of debt mutual funds. There are other factors such as open market operations (OMO) by the RBI and the government borrowing programmes that influence the performance of the debt funds. Moreover, RBI's stance in its latest meeting is 'neutral' against the general expectation of 'accommodative' that is casting doubts on the future rate cuts coming any time soon.
Therefore, if you want to invest in debt funds, you can wait for a while till you get some clarity on the above factors. However, the short to medium duration funds are a better option right now. If you are confident of a slide in the bond yields (bond yields and bond prices move in opposite direction) going forward, it is still better to choose dynamic funds and quality corporate bonds.