Debt Funds Outlook

Dear Friends,

The year 2017 comes to close. What a year it has been !!

Sensex & Nifty have gained by around 30% each while the INR has appreciated by over 6%. Gold has gained by 7%. In contrast, the benchmark 10 year government bond is the worst performing asset in calendar year 2017. The bond yield has risen by 100 bps over the year and has given negative returns.

In my article dated 30th Aug’2016 and 10th April 2017, and throughout 2017, we had advised investors to move out from gilt/duration funds and invest in accrual products as the yields had come down to abysmal lows of 6.30 % in early 2017 without commensurate reduction in rates by RBI.

A brief return summary of Accrual and Duration funds is given below:

Screen Shot 2018-01-23 at 4.47.54 AM

Last 3 months saw bond prices crashing and yields moving to as high as 7.37 % (6.79 % 10 year 2027 Bond). The surge in yield resulted in wiping almost entire year gain for Debt funds. Such high yield is also an aberration, the way it was in early 2017 when yields had hit lows of 6.30%.

India’s macro fundamentals do not warrant a too sharp rise in yields.
– Forex reserves are at record highs
– CAD is still below 2% of GDP

The country can ill afford any increase in interest rates, and as I see it, next 6 -12 months there should be stable interest rate regime unless there is some international event viz spike in oil price, geo political issues etc.

As such, I would advise to continue to be invested in Accrual Products and any new investment that needs to be done should be done in Short term Accrual Product with 12 to 24 month maturity papers only.

Wishing all a very Happy and Prosperous 2018 !!!
With warm regards,
Samrendra Tibarewalla, CFPCM

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