With the RBI taking measures to ease liquidity in the near term, debt fund managers are advising investors to look at shorter-duration funds as an investment option. They also feel that those wanting to invest in long-tenure duration funds should exercise caution as the longer end of the yield curve is likely to remain volatile in the coming months.
?We would advise investors to invest in products of shorter duration as the yield curve is likely to be steeper from here on,? said Sujoy Das, head, fixed income, Religare Invesco MF. According to Vidya Bala, head, mutual funds research, FundsIndia.com, the MSF rate cut and measures to ease liquidity will further ease rates at the short end of the yield curve.
?The latest cut, together with liquidity easing measures, would mean a price rally in short-term debt instruments for some more time,? she said. Bala advises investors to look at ultra short-term and short-term bond funds.
?The carry across tenures is reasonably attractive at this point in time with most asset classes trading at 9%-plus levels that give a good carry protection. Since the total returns are primarily guided by the accrual in the portfolio, along with some upside through capital gains, a higher portfolio carry at the start will aid higher overall returns for investors entering into short-term debt funds,? said Amit Tripathi, head, fixed income, Reliance MF.
?This is also significant because as the RBI infuses more liquidity into the system, short-term rates may come down over the medium term.? Both ultra short-term and short-term bond funds were the top performers in September with average category returns of 1.24% and 1.77%, respectively.
Experts believe that investors should exercise caution before investing in long-duration bond funds. ?The longer end of the curve may continue to be volatile given the RBI?s cautious stance and possibility of further rate hikes. Any negative news flow around the government?s ability to meet fiscal deficit targets could exacerbate volatility,? said Santosh Kamath, CIO, fixed income, Franklin Templeton Investments ? India.