With September rate cut almost a certainty, long duration debt mutual funds are advised to hold on: Marzban Irani of LIC Mutual Fund AMC

After deindexingflows have slowed down duration fundsMarzban Irani, CIO of Fixed income in LIC Mutual Fund AMCtells ETMarkets. However, with September interest rate cut Almost a certainty now, the debt investors They can benefit from longer-duration assets, he recommends.

Extracts:

Q: Following Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole, we are most likely to see a rate cut in September. What should debt fund investors do now as a short-, medium- and long-term strategy?

The implied probability of the Fed Funds shows a 100% chance of a rate cut in September. With a neutral Fed rate of 3%, we can expect some steeper cuts after the election cycle in the US. Even at the national level, we are not far from a change of stance and a shallow rate cut cycle. Investors should continue to invest as the current cycle of falling interest rates is far from over.

Given the inclusion of global bonds, the growing presence of long-duration investors such as insurance companies and pension funds has boosted demand. Against a backdrop of lower core inflation and declining crude oil prices, longer-duration assets are likely to outperform.

Q: What are the current and emerging trends in the debt mutual fund segment?

For corporate investors, there are target maturity funds and ETFs. Basically, investors are playing with duration risk in the current scenario. New avenues of fund management for risk management and improved returns are being discussed with the regulator.

From a retail perspective, debt can be an integral part of asset allocation, providing stability and diversification, while equity serves as the primary driver of growth.

Q: How is the industry preparing for… rate cuts And are players like LIC MF planning to bring in more products in the coming months?

We have taken calls on long-term debt schemes LIC Mutual Fund In line with the plan’s mandate, we have been playing long-term for the past two years. We have the necessary basket of products in our fund, ranging from overnight funds to medium and long duration funds and a benchmark-linked ETF so that investors can make an informed bet.

Q: AMFI data suggests that the number of folios declined significantly in June compared to May, while there was a slight increase in July compared to June. Is the sector seeing less enthusiasm for debt funds and if so, how can this trend be reversed?

Following the removal of indexation, flows have slowed into duration funds. Equities continue to attract the bulk of flows. However, we are witnessing increased awareness and growing interest in debt and fixed income as essential components of asset allocation, a trend that is expected to continue.

Q: The benefit of indexation for investments in LTCG debt mutual funds made before April 1, 2023, has been discontinued. What has been the response of investors to this development?

The changes in the long-term capital gains (LTCG) tax regime announced in the Union Budget 2023-24, primarily the removal of indexation benefit from tax calculation for investments in debt mutual funds made before April 1, 2023, had affected long-term investors of debt mutual fundsThe government may have wanted to provide consistency between the different types of instruments that fall within the same asset class.

Q: Are you seeing its impact in terms of money moving into stocks or perhaps into fixed deposits?

Equity and debt mutual funds have different levels of risk. Equity investors have a higher risk tolerance and are willing to accept volatility. Debt funds, on the other hand, offer the benefits of diversification and stability. From a tax point of view, while gains in debt mutual funds are taxed as per the slab rate, the tax liability only arises on sale of units, allowing long-term investors to defer taxes. In contrast, interest on traditional fixed-income instruments such as fixed deposits is taxed annually on an accrual basis.

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