Are Debt Funds Fading Out?

Are Debt Funds Fading Out?

The increase in bond yield has badly affected the debt funds and about Rs 6800 crore funds were withdrawn in this year August alone.
Due to the rise in interest rates and bond yields, there is now a trend of continuously withdrawing debt fund investments. Let alone in August this year Rs 6800 crore was withdrawn from debt funds, but same time last year an investment of Rs 9810 crore was made to debt funds.
Reasons for rise in Bond yield:
* Value depreciation of rupee
* Inflation distress
* Current account deficit due to the oil price hike
This year, a strong tendency is seen to withdraw investments from debt funds. About Rs 7000 crore was withdrawn from debt funds in July. In the current financial year, excluding one month, the net sale took place in the remaining four months. About 52,700 crores was withdrawn from debt funds during April-August of this year.
For past one year, bond yield was seen growing continuously and it has reached to the highest level after Nov 2014. The bond yield which was 6.50% last year has increased to 8.23% in August. As bond value collapses when interest rate hikes hereby decreasing the bond yield. When considering the chances for interest rate hike this year, about six months before increasing the repo rates two times, the bond sale had increased and a trend had begun of rising bond yields.
Things that affect long-term debt fund investments:
When the interest rate increases, the bond market value and NAV (Net Asset Value) of debt funds decreases. Due to these reasons, investments from long term debt funds are rapidly withdrawn. At the same time, fluctuations in the market rate don’t influence short-term funds (liquid funds, ultra short-term funds). For this reason, about 1.7 lakh crore was invested in liquid funds while investments were withdrawn from debt funds.
Will this condition change?
If Reserve Bank takes necessary actions to uphold rupee value, the hike of bond yields can be controlled temporarily and the trend of withdrawing investments from debt funds can be controlled or ended.
Returns from the debt funds in past year were very low. At the same time, experts suggest that, the right time to invest in debt funds is when the yield is high.
The investments done by small-scale investors are limited. Only 10% of the investments by small-scale investors go to debt funds and the balance 90% investments go to equity funds.