Debt The Forgotten Asset Class

Historically, Indian investors have always been attracted to debt as an investment category in the form of fixed deposits. However, in recent years, investors embraced equity for their investments.

In 2021 and 2022, equity markets saw an unprecedented rally and entered into an overvalued zone by historical parameters. The second half of 2022 saw heightened interest in debt as central banks around the world, including the Reserve Bank of India (RBI) in India, raised interest rates to reign in inflation. As a result, debt came into the limelight after a long gap thanks to the rising attractiveness of the asset class.

Since the pandemic, interest rates in India were brought down to very low levels, owing to which debt became an uninteresting asset class. The year 2022 saw a sharp rise in global inflation which many believed was transient in nature. But in reality, it turned out too sticky, owing to which global central banks were forced to raise policy rates sharply and roll back quantitative easing. This caused a sharp reversal in capital flows, a spike in global bond yields and a sharp correction in global stocks and bonds. In effect, the return potential of debt funds improved considerably. The real rates have turned positive in the Indian fixed-income space. Hence, it is time for investors to lock in funds at higher yields. Currently, the government bonds across tenures are trading between 6 to 7.5 percent which is above the expected consumer price index (CPI) inflation for 2023.