Rupee plunge keeps debt funds under leash as bond yield jumps
Mumbai: Returns from the debt funds in the mutual fund industry are likely to be subdued due to the hardening bond yields following the rupee plunge, according to industry experts.
They, however, maintain that as the rupee stabilises, investor interest will come back to the debt market.
Between April 2 and July 8 this fiscal, the rupee has plummeted by 12.81 percent, and hit all-time low of 61.21 percent yesterday.
"In the short-term, the returns from debt funds, especially gilt funds, will be impacted due to the hardening of the yields of government securities. However, when the rupee stabilises, which will help the Reserve Bank slash lending rates, will support higher returns," UTI Mutual Fund group president and head of fixed income Amandeep S Chopra said Tuesday.
The yield on 10-year benchmark bonds closed at 7.57 percent on Monday as the rupee breached yet another psychological barrier of 61 to the dollar and touched all time low of 61.21 per dollar intra-day, before closing at 60.61 on RBI intervention.
Chopra also said the volatility in the rupee and the bond markets are likely to subside in the next few quarters after which returns will be better from the gilt funds.
He, further, said given the low inflation numbers, good monsoons and a credible fiscal consolidation plan, the RBI would start reducing rates as the rupee stabilises, which would have positive impact on the return.
Bond yields and return in debt funds move in opposite direction. As bond yield falls, return goes up and as it rises, the yield drops.
IDBI MF chief executive officer Debashish Mallick also echoed similar sentiments. "There was an expectation that RBI will cut rates as inflation was coming down. However, fall in the rupee has complicated the matter for the central bank in rate cut front.
"So, as the rupee regains strength, returns from debt funds will be better due to easing of monetary policy by RBI," Mallick said.
He, however, said there is no outflow from these funds as of now due to hardening of the yield. "Return on fixed income products is policy rate-driven. So as the policy rates come down, returns will go up from these funds," Mallick said.
However, another fixed income analyst with an investment firm said there is an apprehension in the market that the RBI may hike rates in the current environment of depreciating rupee, that adversely affects the current account deficit.
"If these apprehensions come true, you will see further hardening of the G-Sec yield affecting the return," he said.
Assets under management of debt funds constitute 75 percent of the total assets of the mutual fund industry.
As per experts, investors can opt for short-duration funds or liquid plus funds for higher return in the current environment than investing into long-term debt funds.