Returns in debt funds come from two avenues. One, accrual which means the coupon or interest that accrues on the instruments in the portfolio. Two, prices of the bonds and/or other instruments that move up or down in the market. The accrual, which is accounted in the net asset value (NAV) every day, is a given. It happens without any conditionality; it happens irrespective of market conditions. It is the market movement that adds to it (if bond prices move higher) or takes away (if bond prices move lower) to the daily accrual in the portfolio.
Recap: 2021 And 2022
These two years were marked by yield levels in the market moving up. Bond yields and prices move inversely, and hence market-related components were impacted adversely. While the coupon accrual in the portfolio was very much there, down-tick in prices was taking away from the accrual. To recall the background why yields were moving up, it started from yields dropping significantly when the Reserve Bank of India (RBI) cut interest rates till 2020 to support the economy. From the very low levels, interest rates had to eventually move up. RBI's rate hike cycle started in May 2022. However, interest rates in the market started moving up from 2020-end. This was due to multiple reasons: high inflation, high fiscal deficit leading to borrowings from the market, and anticipation of rate hikes by RBI.
As an indication, the 10-year benchmark government bond yield was at a low of 5.82 per cent in December 2020, and it started inching up from that level since then. Even before the RBI rate hike cycle started in May 2022, it crossed 7 per cent in anticipation of rate hikes.
Recap: 2023
This story is from the February 2024 edition of Outlook Money.
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This story is from the February 2024 edition of Outlook Money.
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