Equities have outperformed debt funds by a long margin for the last few years. But, with India being expected to enter a rate-cut cycle in a couple of months, things have started looking brighter for debt funds. While large economies like the US have already started cutting rates, India is expected to do the same from February.
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No wonder, debt fund managers are excited. “The Reserve Bank of India (RBI) may have to cut more than 50 basis points in coming months as the rate-cut cycle is getting delayed and the GDP growth is trending towards 6% levels. Investors should add to their duration portfolio to take advantage of high accrual and expected price appreciation in coming months,” said Murthy Nagarajan, head of fixed income at Tata Asset Management.
The combination of a likely rate cut, falling bond yields, improved demand-supply dynamics and a potential sovereign rating upgrade has drawn investor interest to fixed-income products. Long-duration debt funds, which have performed well this year, are particularly in the spotlight.
Debt market funds, having delivered nearly 10% returns this year, are set for further gains as market experts anticipate the rate cycle reversing as early as February.
Despite the RBI holding rates throughout 2024, debt funds did reasonably well, fuelled by expectations of rate cuts and India’s inclusion in global indices like the JPMorgan global bond index.
Long-duration category of funds includes gilts, bonds and dynamic bond funds, stretching over at least six-seven years with predominant sovereign holdings. These are generally considered to benefit from rising prices in proportion to the time to maturity – longer the duration, higher the gains, said experts.
Experts anticipate ultra-short-duration funds, low-duration funds and money market funds to also benefit from the easy rate cycle and yields in the one-year segment, but the scale will be lower compared with long-duration ones.
“The scope for rate cuts in India is on account of high real positive rates and the need to encourage private investment. Investors can look to increase allocation to fixed income at every uptick in yields,” said Puneet Pal, head of fixed income at PGIM India Mutual Fund.
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