Long duration debt mutual funds to benefit from lower govt borrowing

Debt mutual funds investing in long-term bonds could be among the top picks of fixed-income investors as the prospects of lower government borrowing could boost returns from such products. Fund managers said the government’s plan to borrow less in FY25, as announced in the interim budget on Thursday, could result in a reduced supply of its bonds, helping push down yields, and giving the Reserve Bank of India the comfort to cut interest rates later this year.

When bond yields fall, prices rise, and vice versa. Long-term bond funds benefit the most from declining bond yields. Investors could consider putting money into long-duration debt and long-term Gilt schemes, which could earn 10-12% returns in the year ahead

“Investors could gradually add duration in their portfolios, to benefit from rate cuts,” said Dhawal Dalal, chief investment officer – fixed income at Edelweiss Mutual Fund. “We expect policy rates to come down by 50 basis points, in the second-half of the financial year after considering factors like inflation, monsoon, and how the Fed behaves.”

The lower-than-expected net borrowing at Rs 11.75 lakh crore creates a positive background for the fixed income segment and will exert downward pressure on bond yields, said Deepak Sood, head – fixed income, Alpha Alternatives.“That along with the anticipated (JP Morgan) index inclusion demand from foreign investors, are poised to drive interest rates even lower,” said Sood.Following the budget, the yield on 10-year government benchmark dropped to 7.06% on Thursday as against 7.14% the previous day. A cut of 50 basis points could help investors earn a 3-4% appreciation on long-duration funds that have an average maturity of around 10 years, over the next year.”The steps to keep inflation under check could provide enough headroom for the RBI to cut interest rates, which will help long-term bonds in 2024, “said Pankaj Pathak, head of fixed income at Quantum Mutual Fund.