In the fourth bi-monthly monetary policy statement of 2016-17, the Reserve Bank of India (RBI) on Tuesday slashed repo rate by 25 basis points to 6.25%. Fund managers expect that, with some global uncertainty, investors should look at investing in dynamic bond funds.
Since the start of the rate cut cycle, the RBI has cut repo rate by 175 basis points. “While a sizeable market expected a no change, we were of the view that a cut in repo rate was on the cards. In giving the repo cut, the Monetary Policy Committee (MPC) has seized the moment provided by moderating inflation, a good monsoon and the US Fed postponing a rate hike. We believe that room exists for future rate cut; albeit the timing would be data dependent and may gauge for the US Fed stance, and for the 7th pay commission payout impact. Investors may also seek allocation in the accrual and bond short-term funds,” said Lakshmi Iyer, Chief Investment Officer (Debt) & Head of Products, Kotak Mutual Fund.
Unlike gilt or government securities (G-sec) schemes, dynamic bonds funds invest in mix of government as well as corporate paper. These funds also change the maturity of the portfolio and the investment mix depending upon their outlook on interest rates and inflation. While pure gilt funds are directly aligned with benchmark interest rates and investors might witness volatility given the duration of the products.
On Tuesday, the 10 year benchmark g-sec closed at 6.73%. The prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and price of fixed income securities are inversely proportional. When interest rates decline, the prices of fixed income securities increase. Similarly, when there is hike in interest rates, the prices of fixed income securities come down.
Mahendra Jajoo, head fixed income at Mirae Asset Global Investments (India) said, “With inflation looking down and fiscal deficit in good position, we expect rate cut of another 25 basis points in the current financial year.
However debt markets will be volatile in near term due to global issues like Fed policy and investors can look at investing in dynamic bond funds that has better ability to sail in volatile markets.” He also added that, 10 year yield will come to 6.5% by the end of current financial year.
Time to ‘bond’
Unlike gilt or g-sec schemes, dynamic bonds funds invests in mix of government as well as corporate paper
The prices of fixed income securities are governed by interest rates prevailing in the markets
Interest rates and price of fixed income securities are inversely proportional
When interest rates decline, the prices of fixed income securities increase