Bond markets reacted negatively to the large fiscal deficit which came as a surprise in the Budget 2021. Finance Minister Nirmala Sitharaman in her Budget speech announced Rs 12 lakh crore of central government’s gross borrowing in FY22 and an additional Rs 80,000 crore in rest of FY21. Reacting to the big borrowings, the benchmark 10-year GSec yields breached the 6 per cent level post the Budget announcements for the first time since September 2020. Mutual fund managers advise debt fund investors to lower their return expectations from the debt schemes hereon.
“From the bond market’s perspective the Budget had more negatives than positives. Increase in fiscal deficit in the current fiscal year to 9.5 per cent of GDP and target of 6.8 per cent for FY22 was a surprise. This, along with the extended fiscal consolidation roadmap indicate that the bond market will face heavy supply pressure not just in this year but over many years, says Pankaj Pathak, Fund Manager – Fixed Income, Quantum Mutual Fund.
“Investors should lower their returns expectations from fixed income funds and should follow a conservative approach while choosing fixed income products. Interest rates are likely to move higher in coming years,” adds Pathak.
Bond yields and prices move in opposite directions. The NAV of the debt mutual fund schemes fall when the yields rise. The rising yields will have an adverse impact on debt schemes with a higher duration. Long duration and gilt fund categories which topped the charts across the debt mutual fund categories in the year 2020 with double-digit returns, may bear the brunt now. These categories on an average delivered around 12 per cent and 13 per cent returns last year, respectively. Investors should not expect similar returns from the long duration debt fund categories. Fund managers advise investors to stick to shorter duration schemes for now.
“We advise the debt investors to look into the schemes having investments largely into 2 to 4 years maturity as of now and wait for RBI’s OMO guidance before looking at the longer tenor maturity,” says Vikas Garg, Head – Fixed Income, Invesco Mutual Fund.
Short duration debt funds in the last one year gave an average returns of 7.5 per cent, low duration funds gave 5.75 per cent returns and medium duration schemes (6.04 per cent) in the same time period.
“FY21 record high G-Sec borrowings were largely supported by RBI’s interventions in various ways and FY22 would also require a continued support from RBI especially as the credit growth picks up. Any amiss on RBI’s part can harden the interest rates in FY22 which can be counter-productive in supporting the nascent economic growth,” adds Garg.