Excerpts:
Q: After Fed Chair Jerome Powell’s Jackson Hole speech, it is most likely that we could see a September rate cut. What should the investors in debt funds do now as a short-, medium- and long-term strategy?
The Fed Fund Implied Probability is showing a 100% probability of rate cut in September. With the Fed neutral rate at 3% we can expect some sharper cuts post the election cycle in the US. Even domestically we are not far away from a change of stance and a shallow rate cut cycle. Investors should continue to remain invested as the current falling interest rates cycle is far from over.
In light of the global bond inclusion, the increasing presence of long-duration investors such as insurance companies and pension funds have boosted demand. Given the backdrop of lower core inflation and declining crude prices, longer-duration assets are likely to perform more favourably.
Q: What are the current and emerging trends in the debt mutual fund segment?
For corporate investors there are target maturity funds and ETFs. Basically, investors are playing on the duration risk in the current scenario. New avenues of fund management are being discussed with the regulator for risk management and enhanced returns.
From a retail perspective, debt can be an integral part of asset allocation, providing stability and diversification, while equity serves as the primary driver for growth.
Q: How is the industry gearing up for rate cuts and are players such as LIC MF planning to bring more products over the next few months?
We have taken duration calls in debt schemes of LIC Mutual Fund in line with scheme mandate. We have been going long for over the last two years. We have the necessary basket of products in our kitty ranging from overnight fund to medium to long duration funds and an ETF linked to benchmark securities for investors to take an educated bet.
Q: AMFI data suggests that the number of folios came down significantly in June over May month while there was a slight increase in July over June. Is the industry seeing less excitement for debt funds and if it is so, how can this trend be reversed?
After indexation removal, the flows have slowed down in duration funds. Equity continues to attract the lion’s share of the flows. However, we are witnessing increased awareness and growing interest in debt and fixed income as essential components of asset allocation, a trend that is expected to continue.
Q: The indexation benefit on LTCG on debt mutual fund investments made before April 1, 2023, have been discontinued. What has been the response of this within the investor fraternity?
The changes in the long-term capital gains (LTCG) tax regime announced in the Union Budget 2023-24, mainly the removal of the indexation benefit from tax computation for debt mutual fund investments made before April 1, 2023, had impacted long-term investors of debt mutual funds. The Government may have wanted to bring consistency among different types of instruments falling within the same asset class.
Q: Are you seeing its impact in terms of money moving towards equity or may be towards fixed deposit?
Equity and debt mutual funds are at different risk levels. Investors in equity have higher risk tolerance and are willing to accept volatility. Debt funds on the other hand offer the benefits of diversification and stability. From a tax point of view, gains in debt mutual funds though are taxed as per slab rate, the tax liability only arises upon sale of units, allowing long term investors to defer taxes. In contrast, interest on traditional fixed income instruments like Fixed Deposits is taxed annually on an accrual basis.
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