Revival in sight?

Short-duration funds are showing signs of promise. Here's why these funds continually hold merit in being the heavy lifter in your debt portfolio.

In recent years, debt funds have been hauled over the coals debilitating downgrades and defaults, subsequent spirit-sapping segregations, boiling inflation and a rate cycle on a roller coaster. Given their purgatorial journey, only the cold-hearted could expect them to deliver even modest returns in the last 24 months.

What's the way forward for investors?

This is the pits but if you are searching for the light at the end of the tunnel, the first rays seem to be emerging. As rates have been rising so have been the return expectations from debt funds. If you look at the yield-to-maturity of short-duration funds, they have started nudging towards their pre-pandemic levels. Yield-to-maturity (YTM) is an indication of the returns delivered by the underlying bonds held as of now. Though the portfolio might change in the interim, your return expectations from a fund can be around the YTM range, adjusted for expenses. Many fund managers believe the markets have priced in the worst of the rate hikes and that there is only a limited upside in bond yields from hereon. With return expectations rekindled, the situation seems ripe to invest in high-quality short-duration funds.