These funds also change the maturity of the portfolio and the investment mix depending upon their outlook on interest rates and inflation.
The Reserve Bank of India (RBI), in its bi-monthly monetary policy on Wednesday, kept the key policy rates unchanged at 6.50%. However, fund managers expect investors should stick to short- to medium-term debt funds.
Apart from short-term debt funds, the investors can opt for dynamic bond funds and fixed maturity plans (FMPs) in the current scenario, the fund managers feel.
Dwijendra Srivastava, CIO-debt at Sundaram Asset Management Company, says, “There has been no change in stance by the RBI and inflation target has been reduced to 4%. This indicates that, we might now see more rates hikes in the current financial year.”
He also expects 10-year bond yields to hover around 7.40%-7.70% by the end of the current financial year. On Wednesday, the yield on the 10-year benchmark bond closed at 7.44%.
There are a few types of short-term debt funds such as liquid funds, ultra short duration funds, money market funds and short duration funds.
Short duration funds invest in debt and money market instruments where duration of portfolio is between one and three years.
On the other hand, liquid funds, ultra short duration funds and money market funds have instruments maturity between 91 days to one year.
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.
In the past one year liquid funds category and ultra short-term fund category have given returns of 6.81% and 6.09% respectively, data from Value Research showed. While other category such as dynamic bonds and long duration funds have given returns of 3.71% and 4.53% in the last one year, largely due to the volatility and rise in 10-year G-Sec yields.
Some industry players also think dynamic bonds funds are the best bet currently. “Dynamic bonds funds invests in 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. However before investing in such schemes, one has to look at the track record of fund manager as performance of this funds largely depend on their views,” said a debt fund manager from a top fund house.