Gilt-edged opportunity in rate story

By: | Published: August 4, 2015 12:18 AM

Long-term debt funds hold allure as another 50-bps cut seen by fiscal end

While the Reserve Bank of India (RBI) is widely expected to hold key policy rates at its monetary policy review on Tuesday, most fund managers are of the view that the central bank could effect a 50-bps rate cut by the end of the current fiscal.

In this backdrop, they believe that investors should continue to look at investing in long-term debt products, such as gilt and income funds.

Since the start of the calendar year, RBI has reduced repo rates thrice by 25 bps each to 7.25%. “Though the fall in commodity prices should help India, there is still a lot of concern over monsoon. I think he (RBI governor Raghuram Rajan) will hold rates at the coming policy and the next cut will depend on how the monsoon shapes up over the next few weeks,” said Murthy Nagarajan, head, fixed-income, Quantum Asset Management Company.

That said, fund managers believe that even after three rates cuts, investors can still make money by going in for long-term debt funds. They are confident that G-Sec yields could go in the range of 7-7.25%, which could have a positive impact on longer-duration debt products like gilt funds. The 10-year benchmark government bond yield closed at 7.81% on Monday.

Prices of fixed-income securities are governed by interest rates in the market and are inversly proportional. If the interest rate falls, bond prices and, therefore, the fund NAVs rise to adjust to new yields, and vice versa. Income and gilt schemes invest in long-term papers of government and corporates and have higher maturity than medium-term bond funds. So, they are best suited for a falling interest rate scenario.

“While the recent figures on inflation and IIP were not as expected, I think RBI will wait for a clearer picture on the economy and, then, cut interest rates. But we continue to hold the view that there is another 25-50-bps cut likely and investors who are willing to take some volatility can invest in long-term debt funds. By the end of current financial year, the G-Sec yields will settle in the range of 7-7.25%; so, there is enough appreciation still left for investors,” said Dwijendra Srivastava, CIO-debt, Sundaram Asset Management Company.

What’s ahead
* Fund managers believe investors should look at investing in long-term debt products, such as gilt and income funds
* Since start of the calendar year, RBI has reduced repo rates thrice by 25 bps each to 7.25%
* Fund managers are confident that G-Sec yields could go in the range of 7-7.25%

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