1. Long-term bond funds best suited for investors

Long-term bond funds best suited for investors

With the Reserve Bank of India keeping the key rates unchanged in its fifth bi-monthly policy on Tuesday, fund managers expect that investors are best suited to gain from investing...

By: | Mumbai | Published: December 2, 2015 12:12 AM

With the Reserve Bank of India keeping the key rates unchanged in its fifth bi-monthly policy on Tuesday, fund managers expect that investors are best suited to gain from investing in long-term bond funds and income funds having an investment horizon of 18-24 months. However, investors having short-term view should look at investing in medium-term funds, they said.

In the current calendar year, the repo rate has been reduced by 125 basis points (100 basis points = 1%) to 6.75%. Lakshmi Iyer, chief investment officer and head-products at Kotak Mahindra Asset Management Company said, “I think the announcement made by the Governor was in line with expectations and a balanced one. However given the scenario, we see low probability of rate cut in the current financial year. Having said that, I think the 10-year bond yields will come down by 25-30 basis points by the end of current financial year. We believe that duration funds are something which I  will recommend at this point of time.”

Prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and prices of fixed income securities are inversely proportional. When interest rates decline, prices of fixed income securities increase. Similarly, when there is hike in interest rates, prices of fixed income securities come down.

On Tuesday, the 10 year benchmark government securities (G-Sec) yields closed at 7.72%. “As expected, the RBI left key interest rates unchanged and also maintained its accommodative stance, although it comes with a bit of caution. We thus hold our view that the next rate cut (25 bps) would be possible only post the Budget. With the RBI highlighting the impact of Pay Commission on the fiscal numbers, it would want to wait and see the markets’ response to the government’s ability to meet the 3.5% fiscal deficit target,” said Murthy Nagarajan, head of fixed income at Quantum Asset Management Company.

Fund managers, however, said going forward the market would be keenly watching the development from the Fed policy which might hike interest rates in US. “Though long-term products are attractive at this point of time,
but risk averse investors should continue to invest in short-term debt funds,” a debt fund manager said.

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