Debt Schemes Witness Redemptions Amidst Concerns Over Rising Bond Yields

Several investor withdrawals were seen across various debt scheme categories in February, as per the AMFI data. Investors initiated withdrawals as they were worried about the chances of rising bond yields. In February,  duration schemes: ultra-short duration, short duration, medium duration, banking/PSU debt funds, and corporate bond funds recorded combined outflows of Rs 33,320 crore.

As per industry experts, the ongoing Ukraine-Russia conflict has led to uncertainty in debt markets which could be one of the reasons for investor withdrawals from debt schemes. Also, the other reason could be that the US Federal Reserve is signalling a rate hike.

Investors fear that interest rates might increase further based on the US Fed statements. Elevated oil prices, high inflation in the US, and the Ukraine situation could have added to the nervousness in the debt markets; this could have resulted in redemptions.

In February, some debt schemes even witnessed volatility in their Net Asset Values (NAVs) which did not seem suitable for the investors. Mostly, fixed-income investors have a low appetite for market-related volatility. According to fund managers, even domestic factors have added to the uncertainty.

Rising oil prices could have an impact on India’s current account deficit. If the price of crude oil continues to increase, the bond yields could move even higher even in an easy monetary policy.

Due to the Russia-Ukraine conflict, even the commodity prices have gone up, due to which there could be a further increase in inflation from current levels of 6.01 %. 

An investor with an investment horizon of 8 to 10 years can stay put, as the interest rate cycle may get normalised in the long run. Nevertheless, investors need to note that if the bond yields rise as predicted, it would be difficult to make money in debt schemes in the following one to two years.

Investors can choose to keep money in ultra-short duration funds when they have a shorter time frame on their minds. Investors can utilise these funds to save their capital for the time being. As interest rates begin to increase, investors will have fresh opportunities for investing in debt and equity schemes.

For the time being, short-term investors could also look at investing in liquid and overnight schemes to park their capital. Shorter duration schemes are comparatively lesser sensitive to bond yield and interest rate changes.

For any clarifications/feedback on the topic, please contact the writer at bhavana.pn@cleartax.in

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