The yields being offered by debt funds are now similar across categories, with the yield-to-maturity (YTM) of shorter-horizon funds rising at a faster pace than medium-to-longer-horizon funds, market daily Business Standard reported.
As per the report, in December, the YTM of overnight funds rose by 77 basis points (bps), while medium-to-longer-horizon funds like corporate bonds and gilt saw YTMs rise by just 5-10 bps.
Experts told BS that the mismatch was because the shorter end of the yield curve was more responsive to interest rate changes than the medium-to-longer end of the yield curve.
“The yields of short-term debt instruments are directly linked to the repo rate. That’s why they go up with every rate hike. The yields of medium-to-longer-duration are in some way market driven. Since the market had already factored in future rate hikes some months back, there hasn’t been much movement in yields in the last few months,” Rahul Jain, senior vice-president of research at International Money Matters, was quoted as saying in the report.
As a result of higher growth in yields of shorter-duration papers, the YTMs of debt funds across categories are now in a small range, noted BS. It further pointed out that the overnight funds, which invest in debt papers of one-day maturity, now have an average YTM of 6.45 percent.
Among medium-to-longer-duration schemes that have low credit risk, medium-duration funds have the highest average YTM at 7.75 percent. As a result, the difference stood at 130 bps in December compared to 170 in November, it said.
Given the similar YTMs, investment advisors see little merit in taking the duration risk by investing in longer-duration funds, said the report.
“The debt portfolio should be centred around two-three-year maturity. Investors can also look at actively managed funds like dynamic bond funds,” said Lakshmi Iyer, chief executive officer, investment advisory, Kotak investment advisors, as per the report.
Iyer expects YTMs to remain in a similar range in the near term. “It will remain like this until rate cut expectations go up. That is when the short-end of the yield curve will start to come down,” she said.