The latest 25 basis point (bps) repo rate cut by the Monetary Policy Committee (MPC) is expected to give a boost to longer-term debt schemes, said fund managers.
And the good news is that fund houses have been attracting good money from investors that they can deploy. In October, debt funds had recorded their highest inflow in nearly six months of Rs 1.6 lakh crore. However, they were unable to aggressively deploy due to adverse market conditions.
Suyash Choudhary, CIO, fixed income, said, “We had raised our cash levels anticipating higher market volatility. In the past few days, a stronger real GDP growth rate and weaker rupee had also reduced expectations of a rate cut.”
Market Positioning
He added that because of the rise in the yields, they got an opportunity to deploy. “We are back to being overweight 5 – 8-year government bonds. We expect the sovereign curve to remain steeper, and this strategy reflects the expectation,” he said.
A note by Axis Mutual Fund said, “In the near term, markets will be guided by lower inflation, strong growth, OMOs in December and possibility of inclusion in Bloomberg indices, which may provide a tactical opportunity for long bond investing.”
The Reserve Bank of India’s MPC on Friday, while lowering rates said that its decision was shaped by a “goldilocks” backdrop—robust growth and exceptionally low inflation despite a weaker currency.
Accrual vs. Duration
According to Marzban Irani, President – Fixed Income, LIC Mutual Fund Asset Management, while the likelihood of further near-term cuts is limited, the RBI has announced robust liquidity measures. He said, “These actions signal a clear intent to maintain financial stability and support economic momentum.” He explained that with durable liquidity and a low probability of immediate rate cuts, yields are expected to remain firm and anchored. In this environment, investment strategies should focus on accrual at the shorter end and carry opportunities at the longer end, aligning with the evolving policy stance and market dynamics.
Choudhary added that one has to also appreciate the somewhat lower flexibilities that we currently enjoy on both the external and fiscal accounts and the underlying backdrop remains one of relatively low risk appetite for bonds and a likely rise in SDL supply into the year end. “Thus, we don’t expect sustainable duration demand to re-emerge and think that the 5 — 8 year government bond sector remains the sweet spot,” he said.
Puneet Pal, head-fixed income, PGIM India Mutual Fund said, “Corporate Bond Funds with up to 5-year duration present an attractive investment opportunity from a risk/reward perspective.”
He added that dynamic/long-duration funds can be used tactically. Investors with a 12–18 month investment horizon can look at corporate bond funds, given the attractive spreads amidst abundant liquidity. Investors having an investment horizon of 6–12 months can consider money market funds as the current 1-year yield offers attractive carry and roll-down.