With a 50-bps cut in repo rate catching most by surprise, fund managers say investors should continue to look at long-term bond funds and income funds.
The current calendar year has seen repo rate come down by 125 bps to 6.75%. Lakshmi Iyer, CIO & head, products, Kotak Mahindra AMC, said: “This 50-bps cut will have a long-term positive impact on the overall market. Though at this point of time I can’t envisage more rate cuts this fiscal, given the current scenario, the 10-year bond yields will likely remain in the 7.25-7.5% range. Duration funds with one-year-plus time-frame should provide competitive returns to investors.”
Prices of fixed-income securities are governed by interest rates prevailing in the market and are inversely proportional.
On Tuesday, the 10-year benchmark government bond yield closed at 7.61%. “Going forward, we expect RBI to be on hold for some time and consider further monetary action dependent on data. With the credit environment continuing to improve and liquidity conditions easing, we continue to remain positive on corporate bonds and accrual strategies. Despite the recent drop in bond yields we continue to see some value at the longer end of the curve, and recommend investors who can withstand some volatility to consider duration bond/gilt funds for the medium to long term,” said Santosh Kamath, MD, local asset management, fixed-income, Franklin Templeton Investments, India.
Fund managers say, going forward, key risks would be increase in crude prices and the US Fed policy. “Though long-term products are attractive at this point of time, risk-averse investors should continue to invest in short-term debt funds,” said a debt fund manager.