High bond yields are creating an attractive entry point for debt mutual fund investors, with the corporate bond market offering better return potential as expectations of further interest rate hikes are already reflected in prices, according to Manish Banthia, Chief Investment Officer – Fixed Income at ICICI Prudential Asset Management Company.
He added, “Higher the yield, ideally, means that higher the potential return the bond has, and therefore it will look more positively from a more medium term perspective as far as investing in debt funds.”
Banthia believes investors looking to invest over the short to medium term can consider debt funds at current yield levels rather than wait for the Reserve Bank of India (RBI) to complete its rate hike cycle. He noted that corporate bond yields have risen significantly, improving the potential returns for investors entering the market now.
Corporate bonds offer opportunity
Banthia said India’s economic growth has improved, prompting the RBI to move interest rates towards more neutral levels after earlier rate cuts. While further rate hikes remain possible, he believes the market has already priced in a relatively steep tightening cycle.
According to Banthia, yields on two-year to five-year corporate bonds are at their highest levels in five years, making the short- to medium-term segment attractive for investors.
Read Here | Debt mutual funds see ₹1.83 lakh crore outflows in September, liquid schemes lead
Which debt funds should investors consider?
Banthia said the choice of debt fund should depend on an investor’s financial goals and investment horizon. Overnight, liquid and ultra-short-duration funds may suit those looking to park money for shorter periods.
For medium-term investors, he favours flexible strategies that can adjust portfolio duration as interest rates change. Long-duration funds are generally more sensitive to interest rate movements, while shorter-duration funds tend to see smaller NAV fluctuations.
However, investors should also assess the credit quality of the underlying bonds, as higher yields can sometimes come with greater credit risk.
Avoid chasing past returns
Banthia advised investors to avoid making decisions based on market sentiment and historical performance, particularly when online information can create confusion.
“You should not be driven by sentiments and past returns,” he said.
He believes investors should focus on available yields, investment goals and the risks associated with their chosen funds. While elevated yields can improve the return potential of debt mutual funds, actual returns will depend on interest rate movements, credit quality and the fund’s investment strategy.
Watch accompanying video
High bond yields offer attractive entry point, says ICICI Prudential AMC’s Manish Banthia
Also Read | RBI repo rate hike: How mutual fund investors should approach equity, debt and SIPs