Budget impact on debt funds: Fixed income managers may look to add duration to their funds

Debt market experts see yields declining from hereon.

Finance Minister Nirmala Sitharaman announcing the government's aim to contain fiscal deficit for the financial year 2024 and pegging the figure for FY25 at 5.1 percent in the Interim Budget are big positives for debt markets and are expected to decline bond yields, say experts.

Fiscal deficit for the current year came in at 5.8 percent against 5.9 percent targeted in the last budget. The fiscal deficit for the next year financial year (2024-25) is targeted at 5.1 percent and below 4.5 percent for FY2025-26. Further, total borrowing for next year has been estimated at Rs 14.13 lakh crore with net borrowing at Rs 11.75 lakh crore.

Yields on 10-year government securities fell around 10 basis points on February 1 after Sitharaman announced lower gross borrowing for the next financial year.

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Debt market experts see yields declining from hereon.

Devang Shah, Co-Head, Fixed Income, Axis Mutual Fund said : “Lower fiscal deficit and lower gross market borrowings are a positive for debt markets.”

“The bedrock of this budget comes from the conservative numbers from a government that’s confident of uplifting India’s long-term growth in a non-inflationary way. We expect the benchmark yield to trend towards 6.5 percent,” said Kaustubh Gupta, Co-Head Fixed Income, Aditya Birla Sun Life AMC.

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Given the government’s focus on fiscal prudence, Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Research India Private Limited, believes that fixed income managers will be more constructive on adding duration to their funds.

Echoing similar views, G. Pradeepkumar, Chief Executive officer (CEO), Union Asset Management Company, said that from a mutual fund perspective, the government has given very positive signals for both long duration bond funds such as government securities (G-Sec) funds as also for the equity funds in general.

In terms of strategy for investors, Pankaj Pathak, Fund Manager- Fixed Income, Quantum AMC suggests that long-term bonds are expected to do well in 2024. “Investors can capture this opportunity with dynamic bond funds, which are invested in long-term bonds.”

What should investors do?

“In light of the positive surprise on fiscal deficit, we expect yields to come down further at the longer end of the curve and investors can look to increase allocation to long duration and dynamic bond funds,” said Puneet Pal, Head – Fixed Income, PGIM India Mutual Fund.

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In terms of strategy breakdown, Amit Tripathi, Chief Investment officer-Fixed Income Investments, Nippon India Mutual Fund, suggests that long-duration funds could deliver upfront returns via capital gains, while intermediate-duration funds will deliver decent returns over the next 12 months as the steepening benefit catches up with outright duration play.

“I would suggest a 60:40, intermediate: long duration, allocation split for the next 12 months," said Tripathi.

Meanwhile, Murthy Nagarajan Head-fixed income, Tata Asset Management, suggests that investors should lock in to higher maturities to reduce rollover risk of the debt portfolio.

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“Investors’ debt allocation may be 20 percent in gilts and long-term bond funds; 60 percent in short-term and corporate and banking fund; and 20 percent allocation in the money market, ultra and low duration category to meet short term / emergency requirements,” said Nagarajan.

One should keep in mind that fixed income should be considered for reducing risk in one’s overall portfolio.

Financial advisors feel that interest rates are likely to reduce this year and investing in mid and long duration debt funds can be a good option at present for those who would like to invest for a reasonable amount of time in debt instruments.

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“One can also consider dynamic bond funds where the fund manager invests based on their views on interest rate cycle and outlook,” said Harshad Chetanwala, Co-founder, MyWealthGrowth.com.