What investors should do: Make the most of debt opportunity

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Mutual fund players agree that they have taken mark to market hit. Mutual fund players agree that they have taken mark to market hit.
SummaryDrop in returns saw investors pulling out a net of Rs 45,296 crore from liquid/money market products.

On Thursday, the Reserve Bank of India decided to sell Rs 22,000 crore of cash management bills every week to drain out liquidity from the system. Over the last one month RBI has implemented a series of liquidity tightening measures to address the decline in rupee against the dollar. While the impact it had is subject to debate, the measures have resulted in rise in interest rates and also a sharp decline in returns generated by debt funds over the one and three-month period. The returns for majority of debt funds for that period stand in the negative territory and the drop in returns saw investors pulling out a net of Rs 45,296 crore from liquid/money market products in July and a net of Rs 2,657 crore from income funds.

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However, since the measures are not expected to last for long as has been communicated by RBI and a reversal in the stance is expected once rupee stabilises, while the medium to long-term debt investors should stay put with their investments and not press the panic button, those looking to make an entry should latch on the opportunity being offered by the spike in interest rates.

What should existing investors do?

As of now the the average one month return on medium to long-term gilt funds is (-)3.14 per cent and that for income fund and short-term income fund stands at (-)1.83 and (-) 0.99 per cent respectively. Even as the returns have turned negative, “Stay put unless you need the money in the short-term” advises, Surya Bhatia, a Delhi-based financial planner.

The losses are only mark to market losses as the rates went up after RBI implemented liquidity tightening measures resulting into money market moving up from 8.25 to 10.25 per cent and the long-term yields going up by 50-60 basis points. However, if the investors entered the market with 18-24 month perspective they will see their losses recover once the RBI stance reverses.

“If the interest rates don’t go up further and RBI withdraws its measures in a couple of months then the returns would recover and therefore you should remain invested rather than book losses unless you are overweight and took aggressive bets on debt,” said Vishal Dhawan, a Mumbai-based financial planner.

Mutual fund players agree that they have taken mark to market hit. “Mutual fund portfolio will take MTM hit because we are sitting

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