How Should You Build Your Debt Mutual Fund Portfolio Now?

For the past several years, interest rates within the economy have either come down or remained stable. But, experts believe that interest rates have bottomed out now and could well travel in the upward direction in the near future. Therefore, the investment strategy in debt funds that worked very well in the past is not likely to work in the future.

- Sudipta Mitu

Consumer price index (CPI) based inflation has printed outside the Reserve Bank of India’s (RBI) comfort zone of six per cent. It came in at 6.3 per cent in May and 6.26 per cent in June. The RBI has taken the stance that this round of inflation is being caused by supply-side issues. Due to the pandemic, manufacturing and services activities have got disrupted, causing shortages of both goods and services.

Not everyone agrees with this point of view. Some economists and fund managers are of the view that there are certain causes for inflation that are likely to be sticky. As a result, inflation may not come down as quickly as the central bank would have us believe. Take two examples. The global rally in commodities has driven their prices up and no one can tell when this will end. The price of crude oil, which has also moved up in recent months, will only end if the major oil-producing nations decide to ramp up supply. But there is no visibility on whether they will do so. Hence, participants within the debt market are increasingly of the view that inflation is likely to be persistent.