Debt Funds Look to Accruals as Rate Cut Cycle Peaks

Fund managers see little room for further yield decline

- ABHISHEK KUMAR

With the interest rate cut cycle nearing its end, several debt fund managers are shifting their focus towards interest income rather than betting on duration in anticipation of capital gains.

Debt funds, especially those mandated to invest in longer-dated bonds, have delivered outsized returns in the past two to three years as rate cuts, favourable demand-supply dynamics, and the macroeconomic environment led to a sharp decline in yields across the curve.

A decline in yields is positive for bondholders, as it leads to capital gains. However, fund managers and experts say that the room for a further decline in yields is now limited, given that the easing cycle is likely to have run its course.

"Given the rate cut cycle is now close to its end, the possibility of bond yields coming down in expectation of further rate cuts is limited. Hence, the duration play, which was panning out well for some time now, is almost over," said Joydeep Sen, corporate trainer (financial markets) and author.