Build debt fund portfolio diversified across duration

Take limited exposure to longer-duration funds in coming year

- HIMALI PATEL

Debt mutual funds turned in a strong performance in 2024, with longer-duration funds leading the way. In 2025, while rate cuts may begin, the cycle is likely to be a truncated one.

Experts suggest not going overboard on longer-duration funds and instead building a portfolio diversified across duration.

Drivers of performance in 2024 Both dropping bond yields and high accruals contributed to performance. "The yield of the 10-year benchmark government security (G-Sec) dropped from around 7.2 per cent to around 6.8 per cent, creating market gains. In addition, reasonable accrual levels also supported the performance of debt funds," says Joydeep Sen, corporate trainer and author.

The global environment was also conducive. "The decline in global inflation, receding from post-Covid highs, created an environment where long-term interest rates dropped in anticipation of central banks' cuts," says Mahendra Kumar Jajoo, chief investment officer-fixed income, Mirae Asset Investment Managers.

Tight liquidity led to higher short-term rates. "Overnight rates have been around 6.5-6.75 per cent, as system liquidity has been mostly in deficit. Short-term instruments like the 3-month commercial paper and certificates of deposit yielded close to 7 per cent, leading to high average returns in liquid and money market funds," says Sandeep Bagla, chief executive officer, TRUST Mutual Fund (MF).

Inclusion in overseas bond indexes also played a part. "The inclusion of Indian bonds in JP Morgan indices, which brought around ₹1 trillion in inflows, drove performance," says Devang Shah, head-fixed income, Axis Mutual Fund.