Good times ahead

A promising outlook with the headwinds of 2022 in the rearview is setting short-duration funds up for some good returns this year

After suffering for the last two years, the debt markets are hitting a sweet spot. With the interest-rate hikes nearing an end and yields nearing their peak, investors can expect to earn healthy returns in the short to medium term. Even fund managers are of the view that the worst is behind us. Suyash Choudhary of Bandhan Mutual Fund (erstwhile IDFC Mutual Fund) said, “The worst of last year’s commodity shock and dollar strength seem behind us” before adding that “policy rates in many major economies seem close to terminal now and market expectations with respect to the same seem more stable.”

So you can shrug off the disappointment of the last two years and look forward to the return of the good old days, as the stage is set for the short-duration funds to make a comeback.

Improving returns 
The positive effects of rate hikes have already started to kick in. The median trailing six-month returns for short-duration funds have more than doubled in the last six months and are expected to improve from here on (refer ‘Trailing six-month returns’).

The net yield to maturity (YTM minus expense ratio) is a rough indicator of how much return you can expect and its climbing graph is a happy sight for investors (refer ‘Net yield-to-maturity'). Moreover, if you hold them for more than three years, they get taxed at a lower rate than bank fixed deposits, making their case even stronger.