The RBI’s hawkish tone notwithstanding, fund managers are of the opinion that investors with a time-horizon of 18-24 months should continue to go in for long-term bond funds and income funds.

However, those with a short-term view might want to consider medium-term funds, they say.

The current calendar year has seen repo rate brought down by 75 bps to 7.25%.

“Though we don’t expect any further cut till December, it is advisable for investors to look at short-tenure debt funds. Investors who wants to get into long-term debt products should know that such funds are directly aligned with benchmark interest rates and might see significant volatility given the duration of the products,” said a debt fund manager.

Prices of fixed-income securities are governed by prevailing interest rates in the market and the two are inversely proportional.

Rahul Goswami, CIO-fixed income, ICICI Prudential Asset Management Company, said: “With repo rate at 7.25% and possibility of further rate cuts, the 10-year bond yields at 7.85% remain reasonably attractive. Long-term duration funds seem better placed in a downward rate cycle. But for those looking to diversify, a debt portfolio with short- and medium-term bond funds can be a good combination as well. This is a suitable time to invest in such products with an aim to benefit from the falling interest rates and also limit re-investment risk.”

On Tuesday, the new 10-year benchmark G-Sec yields rose by 8 bps to 7.72%. The 8.40% government bond yield due 2024 rose 11 bps to close at 7.93% .

Dwijendra Srivastava, CIO-Debt at Sundaram Mutual Fund, said: “Given the current scenario, we expect another rate cut of 25 bps by the end of the current financial year. There is a strong probability that yields might go below 7.5% by the end of 2015-16.”

RBI, at its bi-monthly monetary policy, said there were three key risks — probability of below-normal southwest monsoon, firming crude prices and volatile external environment.

Given such a scenario, fund managers believe that another rate cut would be data-driven and come only in the last quarter of the current fiscal, which could help investors in income and gilt funds.

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