With the Reserve Bank of India's recently indicating in its Bi-monthly Monetary Policy Review that it would focus more on improving liquidity in the system and less on rate cuts, experts believe that the short-term debt funds would be a better option than long-term funds.
Are you looking to invest in a debt fund? With the Reserve Bank of India’s recently indicating in its Bi-monthly Monetary Policy Review that it would focus more on improving liquidity in the system and less on rate cuts, experts believe that the short-term debt funds would be a better option than long-term funds.
“The focus of RBI going forward would not be as much on rate cuts (possibly 25-50 bps more in FY 2017), but much more on transmission through improvement in structural liquidity conditions. Improving liquidity conditions and steepening of the yield curve will benefit debt funds across the duration and credit spectrum and hence debt funds are expected to do well. Within the various debt categories short-term bond funds and accrual funds will be in focus,” Amit Tripathi, CIO Fixed Income Investments, Reliance Nippon Life Asset Management told FeMoney.
He advises investment in ultra short-term and short-term funds. “We like the 1-5 year part of the yield curve in corporate bonds (both PSU and private) and the below 10 year segment in sovereigns, both of which will perform well due to curve steepening, better liquidity conditions and attractive carry. This means ultra short term and short term bond funds as well as accrual funds which operate in this duration range will do well,” Tripathi said.
He felt long-duration assets may be range bound on an immediate basis. “Long-duration assets will get fresh legs as we get more certainty on the monsoons and inflation, and once we see through a few important global events such as US Fed’s moves over the next 2-3 months. We would prefer investors make their duration allocation through dynamic bond funds,” he said.
R Sivakumar, Head of Fixed Income, Axis MF, agrees. “The RBI has shifted focus away from rate cuts towards providing liquidity to the system. As such the segments of the market that are most sensitive to liquidity are likely to outperform going forward. These are the money market and short-term bonds. Yields on very short term instruments such as commercial papers (CPs) and Certificates of Deposit (CDs) have already fallen as liquidity has improved and this is likely to transmit to the rest of the short term curve. We expect short term funds to outperform long bond funds in this environment,” Sivakumar said.
He said short-term funds are less exposed to rate actions and investors can further reduce interest rate risk by choosing these funds.
Reliance Nippon’s Tripathi advised investors to stay invested in debt funds and not try and time the market. “We don’t believe investors, specially those investing with a medium to long-term horizon should try to time their investments. Since the overall macro environment remains favourable, liquidity conditions are getting better, debt markets will continue to do well, as they have done over the last 24-36 months,” he said.