The returns on long-tenure bond funds took a hit on Friday as the RBI governor surprised markets with a 25-bps hike in repo rate.
In absolute terms, one-day returns of long-duration bond funds declined anywhere between 1.5% and 2.5% as long-term yields rose. The yield on benchmark 10-year bonds rose about 36 bps to 8.559% on Friday. However, liquid funds and short-term bond funds ended in the green as short-term yields softened following the RBI’s move to reduce the marginal standing facility (MSF) to 9.5%. One-year and three-month CD rates softened by 10-15 bps on Friday.
?Investors with a short-term horizon and those who are averse to volatility must avoid investing in duration funds,? said Dwijendra Srivastava, head, fixed income, Sundaram MF. However, he added that those with a long-term horizon could still consider these funds as yields looked attractive. ?While yields are expected to rise in the short term, they may soften in the long term if inflation is brought under control,? he said.
?Short-term debt fund investors are in a sweet spot because of the reduction in MSF rates. As and when the MSF rates are cut further, there could be a further rally in this segment,? said Vidya Bala, head, mutual funds research, FundsIndia.com. The RBI governor indicated in his speech on Friday that the difference between the MSF and the repo rate would be brought down over time to 100 bps from 200 bps at present, which means MSF rates could fall further.
Despite the decline in short-term interest rates, fixed-maturity plans (FMPs) may continue to find favour in the coming weeks, said experts. ?In times of uncertainty, any product which can offer fixed returns for a fixed duration will find takers,? said Killol Pandya, senior fund manager, debt, LIC Nomura MF. FMPs have been selling like hot cakes and have garnered over R15,000 crore last month.
Bond prices and yields typically share an inverse relationship; if yields rise, bonds fall and if yields fall, bonds rise. Fall in bond prices affects net asset value of debt schemes, especially those that have a mandate to invest in longer-duration, say experts.