Debt funds: Are the yields appealing enough to warrant a purchase?

Debt funds: Are the yields appealing enough to warrant a purchase?

Though inflation is not forecast to rise much, rate decreases may take some time. As a result, this could be an excellent moment to invest in debt funds.

Expectations of a below-average monsoon, rising vegetable costs, and firm crude oil prices led many to believe that inflation would surge around the time of the August monetary policy statement.

In August, however, inflation fell to 6.83 percent, down from a 15-month high of 7.44 percent the previous month. Bond yields have also fallen modestly. Does this imply that the bond yield rally is gone and that now is a good time to invest in debt funds?



Sticky inflation has been a source of concern for many central bankers throughout the world, who have pledged to curb price increases by raising interest rates. Though interest rate increases have halted, the stern language about inflation has not.

In the August monetary policy committee review, the Reserve Bank of India raised its inflation forecast for FY24 from 5.1 percent to 5.4 percent. Though inflation in recent months has exceeded the RBI’s 6 percent upper ceiling, many believe it will not be surpassed anytime soon.

“With the moderation in vegetable prices, headline CPI inflation has quickly moderated by 60 bps in August,” said Suman Chowdhury, chief economist and head of research at Acuite Ratings and Research. This is a comfort for the central bank and underscores the government’s efforts to reduce food prices.”

He anticipates food inflation pressures to ease as kharif output enters the market and the government’s administrative initiatives to reduce price pressures on specific food categories intensify. This should help push headline inflation below the upper tolerance barrier (of 6%) in the third quarter of FY24, even if it overshoots the estimate by 40 basis points in Q2. He keeps his FY24 CPI inflation projection at 5.6 percent.

Rates of interest


Simply said, inflation will not rise significantly. If the government’s involvement works and prices stabilize, earlier predictions of a halt to interest rate hikes may still be correct. Rate decreases, on the other hand, may take time.

“Investors should not anticipate a significant change in interest rates in the near future.” The flow of information in the next months should determine whether the RBI changes its attitude,” said Vikram Dalal, founder of Synergee Capital Services.

Bond yields are reacting to the flow of information. The 10-year benchmark bond yield fell to 7.15 percent after reaching a recent high of 7.25 percent and a low of 7.1 percent.

“Bonds have benefited from expectations of the inclusion of Indian government securities in global indices.” Bond yields have fallen as more money is expected to flow in if the index inclusion is approved. If the index is not included, yields will rise somewhat,” said Joydeep Sen, a Mumbai-based corporate trainer (financial markets). JP Morgan added Indian bonds to its emerging-market index on September 21. According to experts such as Sen, this is projected to attract major international investment. According to Moneycontrol, Indian bonds will account for a maximum of 10% of the index, with HSBC forecasting possible flows of up to $30 billion. Bond yields may fall as more foreign money is expected to enter the debt market through government securities.

“Resolving the squabble between the RBI and European market regulators over the audit of some market infrastructure institutions, as well as other operational issues, and including Indian government securities in global debt indices can pave the way for large capital inflows into Indian debt markets, thereby pushing down bond yields,” Dalal said.

If investors pour money into government assets, the 10-year benchmark bond yield might fall to 6.85 percent-6.75 percent in the following six months.

What are your options?


While inflation must be monitored, money flows must not be overlooked. Investors may be able to join in the bond market rise, particularly if the US Federal Reserve announces the end of the rate hiking cycle.

The Fed held interest rates constant on September 20 but left the door open for another rate hike by the end of the year. Though there is no clear indication of a rate cut, patient investors can profit from high-quality bonds.

“Spreads between corporate and government securities are reasonable, compared to a year ago.” In addition, the RBI’s interest rate hikes appear to be coming to an end. As a result, now may be a good time to consider target maturity funds that match your time periods. Corporate bond funds, banking debt funds, and public sector debt funds are also appealing. “Ideally, investors should time their holdings to coincide with the duration of the debt fund,” Sen added.

According to Value Research, the average yield to maturity of corporate bond funds and banking and PSU debt funds is 7.52 percent and 7.5 percent, respectively, as of August 31. Even with a 50 basis point expense ratio, the predicted returns of almost 7% are appealing.

If crude oil prices rise higher and central banks raise interest rates, these funds may see some mark-to-market losses for a short period of time.

As a result, only the most patient investors should consider investing in well-managed debt funds. Though capital gains on debt fund units purchased after April 1 are taxed at the individual’s slab rate, they are only taxed when the investor makes a profit. As a result, debt funds are an appealing instrument for investors to postpone their tax liability.


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