For all the doomsday scenarios painted when LTCG benefits were recently withdrawn for debt funds, on-ground sales activity in the first two months of this FY is painting a very different picture. Ex-liquid and overnight funds, gross inflows into debt funds stood at 1.54 lakh crs (Apr-May2023) as against 1.58 lakh crs same time previous year (Apr-May 2022) –basically signaling no impact.
As long as debt funds offer a clear value proposition to the investor, there is no need for the crutches of tax sops. As Pesi says, “bacche ab bade ho gaye” – debt funds can stand on their own feet, with or without favourable tax rules – so long as the industry along with its distributors continues to focus on creating and delivering solutions that offer tangible value to investors.
At the core of debt funds lies accrual income – or yield. Around that, at various points of time, different products become more relevant based on market dynamics. You might at times want to go down the rating curve to boost yield, other times you might want to play on duration in the quest ofcapital gains.
Don’t write off target maturity funds just yet – they have huge potential for lot more innovation and lot more growth. So far, TMFs have only focused on the safest assets (gilts/SDLs/PSUs). There is scope for ample innovation in portfolio composition and maturities to provide investors a full laddering of risk-return trade-off options.
Expect lot more competition in debt space from PMS/AIFs asmore experienced investors seek differentiated alpha focused solutions, nowthat the tax playing field has been leveled.
Pesi’s guidance to investors:
1. Past returns in debt funds (in a rising rate cycle) are not indicative of likely future returns (in a flat to downward rate cycle)
2. Define your time horizon clearly (now that the default tax-oriented 3 yrs is no longer relevant). Just as you hold your PPF for 15 years, consider debt funds for the long term
3. Just as you create a core & satellite portfolio in equity, create a similar core in debt with conservative accrual based funds and have satellites across credit and duration as situations warrant.