Debt fund investors are facing headwinds yet again. As if sub-par returns during the low-interest regime weren't enough, the rise in rates in recent weeks have led to capital losses. And things may not be smooth sailing until the Reserve Bank of India (RBI) is through with the rate cycle. That said, things aren't as bad as they seem. The rising rates will start reflecting in the accrual income of funds and in your returns. Even history suggests the same. Look at the highlighted portions in the graph titled Rising rates and its impact on debt funds. One can see that as rates cycle tapers off, the one-year rolling returns take time to recover (not without witnessing steep hits). So, this is just a passing phase. Rest assured, once the rate cycle stabilizes, the returns will start improving - something that short-duration funds' yield-to-maturity have already started pointing out. Yield-to-maturity (YTM) is an indication of the returns delivered by the underlying bonds held as of now. What's the way forward for investors? As rates rise, so do the returns expectations from debt funds. If you look at the yield-to-maturity of short-duration funds, they have started nudging towards their pre-pandemic levels. Though the portfolio might change in the interim, your return expectations from a fund can be around the YTM range, adjusted for expenses. Many fund managers believe the markets have priced in the worst of the rate hikes and that there is only a limited upside in bond yields from hereon. With return expectations reki
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