How to maximize returns on your debt mutual fund investments
Subscribe to enjoy similar stories. The 10-year Indian bond yield, once trading at 12-13% in the late 90s, has now dropped from its 5-year high of around 7.5% to 6.7% as of February-end 2025. With the start of the interest rate cut cycle, yields are expected to fall further.
And with no indexation benefits in debt mutual funds, this raises an important question: “How can investors maximize on their fixed income returns?" Typically, there are two ways to maximize debt mutual fund returns – 1. By taking credit risk (investing in risky lower-graded debt instruments) and 2. By taking duration risk (investing in safer, high-graded long maturity debt instruments).
Let us see how these strategies have played. We have considered popular funds in equal allocation from these three debt categories – 1. Credit Risk Funds (HDFC, Kotak, ICICI & SBI), 2.
Corporate Bond Funds (HDFC, Kotak, ICICI & ABSL) and 3. Constant Maturity Gilt Funds (ICICI & SBI). In terms of a 3-year-daily rolling CAGR returns from 1 Jan 2018 to 28 Feb 2025, credit risk funds generated a 7% CAGR on average, an 8.8% CAGR at the maximum and 5.4% CAGR at the minimum, corporate bond funds at 7.3% CAGR on average, 9.2% CAGR at the maximum and 4.9% at the minimum and lastly constant maturity gilt funds at a 7.8% CAGR on average, 11.7% CAGR at the maximum and 3.2% CAGR at the minimum.
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