Remain invested despite May rout in debt funds, says Avnish Jain of Canara Robeco AMC; invest in overnight, liquid funds to ride interest rate risks
The surprise rate hike in May probably led to outflow from debt funds, as expectations of further rate hikes could have dented returns and some investors may have booked profits to wait for a better rate level to re-invest, Avnish Jain, Head Fixed Income at Canara Robeco Asset Management Company says
If you are an investor in debt Mutual Funds and are worried about the current rout in many schemes that have performed poorly in May, then you must consider some tips from experts to make informed decisions before jumping into one.
In May, net outflows from income or debt oriented schemes stood at Rs 32,722 cr which was in sharp contrast from the performance of open ended debt schemes in April and witnessed a net inflow of Rs 54,756 cr in April. As for closed ended debt schemes, the net outflow was Rs 10,573.56 cr in May.
The data published by Association of Mutual Funds in India (AMFI) reveals that in the 16 open ended debt schemes, 12 categories witnessed net outflows. Money Market Fund was the worst performer with net outflows of almost 14600 cr. Short Duration Fund (-8,603.03), Low Duration Fund (-6,716.30), Ultra Short Duration (-7,104.96), and Fund and Floater Fund (-5,285.55) were the other top laggards.
“The surprise rate hike in May probably led to outflow from debt funds, as expectations of further rate hikes could have dented returns and some investors may have booked profits to wait for a better rate level to re-invest,” Avnish Jain, Head Fixed Income at Canara Robeco Asset Management Company Limited said.
In India, CPI inflation marginally crossed the Reserve Bank of India’s (RBI) tolerance level of 6 per cent in January 2022 and has only accelerated from March with April CPI printing at 7.8 per cent.
“This likely prompted the monetary policy committee (the MPC) to do an off-cycle policy hike of 0.40 per cent on May 4, 22 and it was followed by another hike of 0.50 per cent in scheduled June MPC meeting, taking the repo rate to 4.90 per cent. It is expected that RBI may hike rates more in next policy as well,” Jain opines.
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Global inflationary pressures have been building up since start of 2022, he said.
While the US Federal Reserve has already raised the key FED Funds rate by 0.75 per cent since March 22, the rate tightening is expected to continue further, he further said.
Jan said that the investors should continue to hold their investments in debt funds according to their portfolio allocation strategy and life goals. “Like any other market, debt market also sees rate up and down cycles and investors should not try to time markets for investment or switch within fund categories,” he added.
In contrast, overnight and liquid funds were top performers with the former ahead by large margin. Net inflows for overnight funds stood at 15070 cr in May while net inflows for liquid fund were at nearly 1777 cr.
Jain explains that the overnight and liquid funds are less interest rate sensitive products on investment restrictions in terms of maximum maturity of paper these funds can invest in.
“Overnight funds can invest in only 1-day money market instruments like Repos. The interest rate risk in this type of fund is minimal. However, the returns are also commensurately lower (near overnight rates). Liquid funds can invest maximum in 91-day money market papers, but generally the average maturity is much lower,” he said.
“This reduces interest rate risk considerably, say compared to a short duration fund or a corporate bond fund. Investors may look at investing in both these products from short term investment horizon, as in a rising rate scenario, the interest rate risk is reduced in the above 2 products,” he further said.
(Disclaimer: The views/suggestions/advises expressed here in this article is solely by investment experts. Zee Business suggests its readers to consult with their investment advisers before making any financial decision.)
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