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Markets have corrected by 5%, but not a good time to buy debt MFs

Amitabh Tiwari & K Shankar
·3-min read

The Sensex has corrected from its high of 52,500 levels to 51,000 levels currently, as expected by several analysts, primarily due to overheating.

The correction of about 5 per cent has been welcomed by experts as it is likely to broaden the investor base.

And this is a good time to buy good quality stocks or invest in index funds as indicated by the ‘buying in dips’ strategy.

On the other hand, the G-Sec yields have also been on a rising trend. The average increase in the 3-, 5- and 10-year bonds have been around 31 bps since the budget.

The 10-year G-Sec is currently trading at 6.18%.

AAA rated corporate bonds of highest credit quality and state development loans have witnessed an increase of 25-41 bps during this period.

Bond yields have hardened ever since the government announced an additional borrowing of Rs 80,000 crore for FY 20-21 and Rs 12 lakh crore for FY 21-22.

It’s said that the bond market cues often reflect in equity markets. It is due to this reason that the equity markets have undergone a correction.

Other reasons include correction in the US markets, increase in commodity prices, hardening of US treasury yields and some profit booking.

While Modi 2.O has adopted the strategy of spending its way out of the economic crisis, this could fuel inflation and lead to an increase in interest rates.

In this context, is it a good time to book profits and invest some money in debt mutual funds. We try to analyse.

The graph below depicts the trend of 10 year Gilt (G-Sec) Yield since 2000. It is interesting to note that whenever the yield touches 9% or more it starts falling subsequently and as soon it touches below 6.5% then it starts to go up again.

Unlike equities, returns on debt mutual funds are inversely proportional to the yield. Which means if the yield is rising then one tends to lose money and when the yields are falling one tends to make profits.

If one compares this to returns on Nifty50, an interesting trend emerges as depicted in the following chart.

We find that the monthly positive Nifty returns tend to be more in number whenever the Yield curve is rising and there are more negative monthly returns months on Nifty whenever the Yield is falling.

As we had mentioned in our article, the decision to continue with SIP in one’s equity fund should be pragmatic and one should consider other factors such as interest rates as well.

Using the above analysis, we conclude that whenever 10 year G Sec is trading at 9% or above, investors should invest more in debt as compared to equity.

Whenever the yield is below 6.5% then equity corpus should be more than debt.

To sum up, though the yields are rising, and markets have corrected, it is still not the appropriate time to invest in debt mutual funds. One should think about it when the yield touches 8%-9%. That will take some time to reach...


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