Debt funds in red after budget. What should mutual fund investors do?

Debt mutual funds are in red. A day after the budget, most debt mutual fund categories are in the negative territory. This fall was triggered by the sharp rise in bond yields in response to the higher-than-expected gross market borrowing numbers of the Union government. The expected rise in inflation is also keeping the bond market on tenterhooks.

Gilt funds with 10- year constant duration fell 1.01% yesterday, followed by long-duration funds which fell 0.71% in one day. Shorter-term funds like liquid funds and overnight funds fell less than other categories. The favourite- floater funds - also took a hit of 0.11%.

"Bond yields rose across the curve on the back of the unexpected higher borrowing numbers. The 10- year benchmark bond yield went up by 15 bps to 6.83%. The demand-supply mismatch will get accentuated as we believe that RBI will not be conducting OMO’s given the liquidity surplus in the system though it can do tactical operation twists. There was no timeline given on the inclusion of government securities in the global benchmark indices," says Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund.


Here's a look at the categories that fell the most in a day after budget:

Mutual fund advisors and planners believe that the coming few months can be tricky for debt mutual fund investors. However, they also say that what happened today is a knee-jerk reaction of the market and is not sustainable. "These are mark-to-market losses and investors shouldn't react to them instantly. Having said that short duration funds like liquid schemes, overnight funds, etc., are well placed in the current scenario. If you are invested in short-duration funds, liquid funds, overnight funds, or any scheme with a duration lower than three years, you are fine. Don't make any hasty decisions. The market will stabalise in a few days and returns will be back to normal," says Harshad Chetanwala, Founder, My Wealth Growth, a financial planning firm based in Mumbai.

Experts believe that RBI's rate cycle reversal will not be a quick path and hence there might be too much risk in the medium and longer duration schemes. "Given that the rate cycle is turning with RBI expected to raise rates in FY23, we believe that the curve can continue to remain steep and with long bonds remaining under pressure on higher borrowing. We continue to advise investors to stay in short duration funds( 1-3 yrs duration) as RBI will not be aggressive in hiking and the short end of the curve will continue to be supported by excess liquidity," says Puneet Pal.