Debt funds may again draw investors’ attention as yields improve

The yield-to-maturity (YTM) of debt funds have been rising steadily for almost a year. At the end of January, the YTMs of popular medium-term debt schemes like corporate bond funds and short-duration funds touched an average of 7.5 per cent, which is the highest since Covid’s outbreak.

The persistent volatility in the equity market and poor equity fund returns in the last one year are also working in favour of debt funds, according to investment advisors. The benchmark Nifty50 is down 3.5 year-to-date and is even below levels seen during October 2021.

“Money has been flowing into debt schemes from retail and HNI investors, despite rising competition from bank fixed deposits,” said D P Singh, deputy managing director and chief business officer, SBI MF.

Major banks have raised fixed deposit (FD) rates to around 7 per cent, which is similar to what medium-horizon debt funds are offering post expenses. However, debt funds have an upper hand in taxation. Long-term investment in debt funds is taxed at 20 per cent with indexation benefits, while gains from bank FDs are taxed as per the investor’s tax slab.