Govt borrowing plan roils debt market, here's what you should do

Corporate India has hailed Budget 2021 as bold and growth-oriented while the bourses have also given it a thumbs-up.  However, investors of debt category have a lot to worry with fiscal deficit pegged at 9.5% and 6.8% of the GDP for FY21 and FY22 respectively.

Moreover, government has planned a Rs 12-lakh crore borrowing for FY22 in the budget. This has fuelled negative sentiments in the debt market with yields rising.

“If you have a long duration investment in a commercial paper, the rise in interest rates will bring huge losses. The bond market has turned negative and there is a sell-off in long duration funds. Looking at the current scenario of fiscal deficit and amidst rising crude prices, investors should stay away from a long duration debt investment,” said Pankaaj Maalde, certified financial planner.

Equity funds are riskier for the short-term and investors with goals planned for the next three to four years are usually inclined to debt for diversification. Should one make a change in asset allocation with the recent dent to the debt market? Maalde doesn’t suggest a change.

“Asset allocation is more dependent on time horizon and the risk profile. If the investment is for long duration, then one can opt for 90 percent allocation in equities. One should avoid debt market for two reason – the yield may go up further and there is little room with RBI to cut the rates further due to fiscal rates. Also, when the loan moratorium period is over, there will be clarity on credit risk,” he said.

Experts say they recommend liquid funds or ultra short-term funds, beyond which the risk of rising interest rates are higher.