Debt mutual funds are a must in your portfolios as interest rates rise: Report

Fixed income assets like debt mutual funds should form a part of investors’ portfolio irrespective of the risk profile, says a report by Motilal Oswal Private Wealth. The report called The Alpha Strategist, highlighted that because of the US Fed, along with global central banks, hiking interest rates at the fastest pace ever historically, the cost of capital is higher. This has led to the de-rating of equity market valuations.

According to Ashish Shanker, MD & CEO, Motilal Oswal Private Wealth, “With the rise in interest rates, Fixed Income becomes a very important asset class, and should form part of the portfolio irrespective of risk profile. Unlike the US, India does not face similar concerns on inflation, hence interest rates are likely to peak out soon domestically. The yield curve in India has flattened out with the 1-year to 10-year G-sec yields trading in a narrow band of 6.75-7.35%.”

Shanker further said that he advises core allocation to the 4-5 year maturity segment through high credit quality, Target Maturity Funds which invest in a combination of G-sec, State Development Loans (SDL), and AAA-rated instruments. Tactical allocation to select high-yield private credit strategies, MLDs, REITs, InvITs can help enhance the yield on fixed-income portfolios. He also said that Gold should be treated predominantly as a hedge against heightened volatility.

According to the report, the decade of 2013-22 belonged to US equities (S&P500) followed by Indian equities (Nifty50) and Developed Markets (MSCI DM). Sharing inferences from the perspective of the year 2022, Alpha Strategist report cited that Gold was the lead performer as an asset class providing returns of 13.9%. Liquid Index offered returns of 5.1% which is better than returns offered by Nifty 50 of 4.3%. The outperformer of 2013-22, US Equities gave negative returns of 10.7% in 2022. In a combative bid, the US Fed, along with global central banks, has resorted to hiking interest rates at the fastest pace ever historically. Higher cost of capital has led to the de-rating of equity market valuations.

On the equity side, the report said that the last decade belonged to ‘Growth’ (Earnings Momentum & Quality). The ‘Value’ style, which typically includes cyclical sectors like Financials, Capital Goods, Power, and Real Estate, underperformed. “There is a likelihood that some of these cyclical sectors could do much better going forward relative to the last decade. However, we recommend that an equity portfolio needs to have a judicious mix of both investment styles – Growth & Value,” said Ashish Shanker.

Momentum stocks gave strong returns of over 19.9% CAGR which is much higher than returns given by Quality and low-volatility stocks of 16.3% and 15.8% over the last decade. This clearly indicates that the last decade belongs to investors who were chasing momentum stocks. Nifty 200 gave returns of 13.6% while Value stocks gave the lowest return of 10.3% in the past 10 years.