After a stellar 2024, debt MFs set for best annual performance in 4 years

Debt mutual fund (MF) schemes are set to register the best calendar year (CY) performance in the last four years despite no changes in the interest rate.

 

An analysis of one-year performance of debt funds show that many of the schemes are set to deliver double-digit returns in CY 2024. Long-duration funds have been the best performers among schemes that invest only in top rated papers. All seven schemes in the category have delivered more than 10 per cent in the last one year.

 

Most gilt funds and dynamic bond funds are also up more than 9 per cent, shows data from Value Research.

 

The strong performance, according to experts, can be attributed to several positive developments during the year, including the inclusion in global bond indices and fiscal prudence.

 

"Bond yields started the year at elevated levels, under tight liquidity conditions, high inflation and a cautious Reserve Bank of India (RBI) stance. During the year, a number of factors turned positive for domestic bonds. Headline inflation started easing and core inflation, i.e. headline minus food and fuel collapsed to multi year lows," said Sandeep Bagla, CEO Trust Mutual Fund.

 

Indian government bonds got included in the JP Morgan Global Bond Index this year. The domestic bonds are also set to get included in FTSE Russell EMGB Index and Bloomberg EM Local Currency Government indices in 2025.

 

"Government bonds were finally included in a few global bond indices, which ensured that there will be consistent buying interested from foreign investors who track the indices," he added.

 

The 10-year government bond yield, which stood at 7.17 per cent at the start of the year, is now at 6.79 per cent.

 

A decline in yields is positive for the bond holders as prices and yields move in opposite directions. The movement in yields largely depends on the demand-supply dynamics, the changes in interest rate and other domestic macro and global factors.

 

Funds with a shorter investment horizon like money market funds, low duration funds and ultra-short duration funds are also set to deliver multi-year high returns in 2024. As of December 19, they had delivered close to 8 per cent return in the one year period.

 

According to fund managers, there is a possibility of 2024 momentum continuing in 2025. The expectation of rate cuts by RBI is being seen as a tailwind for the debt market next year.

 

"We expect growth to slow cyclically with leveraged consumption slowing and business sentiment perhaps facing more uncertainty given the proposed new tariffs and pressure from China exporting away its excess capacity. Inflation outliers will likely subside soon enough and should allow the RBI to start a shallow monetary easing cycle from early next year. Core system liquidity has depleted substantially, and if balance of payment won’t post meaningful surpluses for the near future, then the RBI will likely have to buy bonds to shore up permanent liquidity. Thus, the bond market may have tailwinds from both open market operations (OMOs) and rate cuts in the year ahead," said Suyash Choudhary, Head – Fixed Income, Bandhan AMC.