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  1. Fund managers see rate hikes ahead; bat for short-term funds

Fund managers see rate hikes ahead; bat for short-term funds

Participants in the industry also say that in the next one and half months there would be no auction, which could result in markets being range-bound for the next few weeks. But coming into April, the key challenge would be how the government announces its borrowing programme and at that point there might be some pressure on the G-Sec curve.

By: | Mumbai | Published: February 8, 2018 2:05 AM
The Reserve Bank of India (RBI), in its sixth bi-monthly policy on Wednesday, kept the key rates unchanged.

The Reserve Bank of India (RBI), in its sixth bi-monthly policy on Wednesday, kept the key rates unchanged. While this provided some comfort to fund managers, they remain concerned about inflationary pressures. Fund managers suggest that investors should look at short to medium term funds, instead of long-term funds in the current scenario. In the past three years, RBI has cut repo rate down by 200 basis points (100 basis points=1%) to 6%. R Sivakumar, head of fixed income at Axis Mutual Fund, said: “Policy is in line with our expectations. Apart from the rising price of oil, the budget too has introduced new upside risks to inflation, like fiscal deficit, increase in import duties and potential increases in minimum support prices for crops. But from the markets point of view the concerns on fiscal deficit and inflation means that long end of the G-Sec curve will continue to remain under pressure.” On Wednesday, 10-year benchmark government securities (G-Sec) closed at 7.53%. “Given the current situation we foresee a rate hike in the next financial year. But the quantum of the rate hike and when it would be announced is difficult to predict at this point of time,” said Dwijendra Srivastava, CIO-Debt at Sundaram Asset Management Company. He also added that the 10 year yield will continue to remain in the range of 7.4%-7.6% in the next few months.

Participants in the industry also say that in the next one and half months there would be no auction, which could result in markets being range-bound for the next few weeks. But coming into April, the key challenge would be how the government announces its borrowing programme and at that point there might be some pressure on the G-Sec curve. The prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and price of fixed income securities are inversely proportional. When interest rates decline, the prices of fixed income securities increase.

Similarly, when there is a hike in interest rates, the prices of fixed income securities come down. Some industry players argue that dynamic bonds funds and credit opportunities are best bets in current times. “Dynamic bond funds invest in a mix of government as well as corporate paper. These funds also change the maturity of the portfolio and the investment mix depending upon their outlook on interest rates and inflation. On other other hand, with economy likely to see higher growth going forward, investors can also take a small exposure in the short term corporate bond oriented products,” said a debt fund manager from a top fund house.

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