The yield to maturity (YTM) of short-to-medium duration debt mutual funds (MFs) have started to taper off, following the Reserve Bank of India’s (RBI’s) decision to pause interest rate hikes, a report by Business Standard said. YTM, which hints at future returns, was trending upwards, across categories, since the central bank kicked off its interest rate hike cycle in May 2022 to curb inflation, it noted.
Fund managers told BS that YTMs of most short-to-medium horizon schemes had started to come off their highs in March itself and went on to decline further in April. Meanwhile, the YTMs of longer horizon schemes had peaked last year and have moved to a narrow range since, they added.
“The MPC meeting broke its streak of rate hikes, surprising the markets and leading to effectively resetting market expectations and cooling off of yields. We are in a long rate pause period after the MPC meeting. As per our assessment, shorter end rates shall remain within a range,” Manish Banthia, deputy chief investment officer (CIO), fixed income, ICICI Prudential AMC, was quoted as saying in the report.
Meanwhile, according to Lakshmi Iyer, chief executive officer (CEO), Investment & Strategy, Kotak Investment Advisors, one of the reasons for the decline in yields in April was the heavy deployment of funds by MFs. And once this slows down, she expects the yields to rise again, the report said.
MFs received net inflows of close to ₹40,000 crore into target maturity funds and active debt schemes — like corporate bond funds — amid an investor rush for debt schemes before the end of indexation benefits in April. Overall, experts see the yields and the YTMs moving in a narrow range on expectations of a long pause in the interest rates, stated the report.
However, the expectations of another interest rate hike cannot be completely ruled out, say some experts, as per the report.
This, combined with the fact that the risk-reward equation still favours shorter-to-medium duration funds, investment advisors and distributors are advising their clients not to rush for longer horizon debt funds on fears of missing out on high yields, informed BS.
“The mid part of the yield curve seems like a sweet spot right now from a risk-reward perspective,” said Rushabh Desai, founder of Rupee With Rushabh Investment Services, as per the report.