Bond yields witness surge: What should debt MF investors do?

Henil Shah
/ Categories: Mutual Fund, MF Unlocked
Bond yields witness surge: What should debt MF investors do?

The 10-year benchmark bond yields have surged to around 6.16 per cent. The last time that it was at this level was in May 2020. As a result, net asset values (NAV) of long-term dedicated debt mutual funds skidded.

 

Hence, in the last one-month, long-duration funds, gilt funds, and medium to long-duration funds fell by 2.40 per cent, 1.91 per cent and 1.48 per cent, respectively. This was amid yields rising by around 40 bps (100 bps equals one per cent). Further, the northward movement in the yield of government securities dragged down one-year returns of the long duration debt funds and gilt funds. The drag was such that it moved from double-digit returns a month ago to a single digit, staring at around 8 per cent for both the debt mutual fund categories.

 

There is an indirect relationship between yields and bond prices. As the yields jump, the bond prices fall, and vice versa. Therefore, returns of the duration debt funds fall as yields ascend. Thus, the recent fall in the yields of the 10-year benchmark bond was due to the announcement of open market operations (OMO) by Reserve Bank of India (RBI). The OMO of government securities is worth Rs 20,000 crore. This would be conducted in two tranches, first being on August 27, 2020, and the second on September 03, 2020.

 

What should debt mutual fund investors do?

Investors should keep such short-term movements in the fixed income markets at bay and stick to their asset allocation and goal-based financial plan. Amid volatility, it is prudent to stay invested in short-duration funds.

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