Should you invest in debt funds in 2022?
2021 proved to be a mixed bag for debt funds as interest rates hardened pulling down returns of debt schemes. How different will 2022 be?
- Dec 29, 2021,
- Updated Dec 29, 2021 3:58 PM IST
2021 proved to be a mixed bag for debt funds as interest rates hardened pulling down returns of debt schemes. While most debt schemes ranging from liquid funds to long duration funds returned between 3-4 per cent not even beating inflation, credit risk category funds, that invest in relatively lower quality debt, however, gave higher return at more than 9 per cent.
“Rising inflation caused by sharp economic recovery and global supply chain disruptions led to increased expectations for policy rate hikes across the globe. This has caused a fall in the benchmark bond yields over the last quarter of 2021. As the returns generated by debt funds have an inverse relationship with the interest rates, the returns generated by the debt funds this year have been on the lower side,” says Naveen Kukreja – CEO and co-founder, Paisabazaar.com.
Outlook for 2022
Experts say investors should prefer debt funds having shorter maturity profiles in a rising interest rate regime as their lower average maturity makes them less sensitive to interest rate changes. “It seems in 2022 increasing interest rates will be on the cards so in debt space Debt MF - Floating Interest Funds, Fixed Maturity Funds will be good bet,” says Viral Bhatt, Viral Bhatt, founder, Money Mantra.
But overall, as economic activity recovers and corporates maintain profitability, credit risk funds could continue doing well, says Aditi Sholapurkar co-founder of SALT, a financial services app tailored for women.
She added, “But if 2022 sees interest rates rising they would likely fall a tad more than short-duration debt funds. Overall, investing selectively in credit risk funds that don’t cross 3 years in duration could be a decent strategy for diversification but I would not allocate more than 10-20 per cent of my portfolio to these. I would skip short-duration and corporate bond funds unless I need to park idle money before funnelling into equity/equity funds.”
It is quite likely that returns will be subdued in the first few months and the gradually pick up in second half of the year. “High commodity prices and inflationary expectations will keep market sentiment subdued in longer bond markets. As RBI normalises rates, short term rates will rise and then stabilise. It is likely that funds with less than 3 year duration outperform funds with longer maturities. The outlook for 2022 can be described as tentative and mixed,” says Bagla.
Also Read: Stock brokers seek lower registration fees for selling mutual funds
Also Read: Are you confused about whether you should go the SIP route?
2021 proved to be a mixed bag for debt funds as interest rates hardened pulling down returns of debt schemes. While most debt schemes ranging from liquid funds to long duration funds returned between 3-4 per cent not even beating inflation, credit risk category funds, that invest in relatively lower quality debt, however, gave higher return at more than 9 per cent.
“Rising inflation caused by sharp economic recovery and global supply chain disruptions led to increased expectations for policy rate hikes across the globe. This has caused a fall in the benchmark bond yields over the last quarter of 2021. As the returns generated by debt funds have an inverse relationship with the interest rates, the returns generated by the debt funds this year have been on the lower side,” says Naveen Kukreja – CEO and co-founder, Paisabazaar.com.
Outlook for 2022
Experts say investors should prefer debt funds having shorter maturity profiles in a rising interest rate regime as their lower average maturity makes them less sensitive to interest rate changes. “It seems in 2022 increasing interest rates will be on the cards so in debt space Debt MF - Floating Interest Funds, Fixed Maturity Funds will be good bet,” says Viral Bhatt, Viral Bhatt, founder, Money Mantra.
But overall, as economic activity recovers and corporates maintain profitability, credit risk funds could continue doing well, says Aditi Sholapurkar co-founder of SALT, a financial services app tailored for women.
She added, “But if 2022 sees interest rates rising they would likely fall a tad more than short-duration debt funds. Overall, investing selectively in credit risk funds that don’t cross 3 years in duration could be a decent strategy for diversification but I would not allocate more than 10-20 per cent of my portfolio to these. I would skip short-duration and corporate bond funds unless I need to park idle money before funnelling into equity/equity funds.”
It is quite likely that returns will be subdued in the first few months and the gradually pick up in second half of the year. “High commodity prices and inflationary expectations will keep market sentiment subdued in longer bond markets. As RBI normalises rates, short term rates will rise and then stabilise. It is likely that funds with less than 3 year duration outperform funds with longer maturities. The outlook for 2022 can be described as tentative and mixed,” says Bagla.
Also Read: Stock brokers seek lower registration fees for selling mutual funds
Also Read: Are you confused about whether you should go the SIP route?