Long-term bond, income funds still remain attractive: Fund managers

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Mumbai | Published: February 3, 2016 1:12:57 AM

Though the Reserve Bank of India kept the key rates unchanged on Tuesday, fund managers expect that investors will benefit from investing in long-term bond and income funds having an investment horizon of 18-24 months.

Though the Reserve Bank of India kept the key rates unchanged on Tuesday, fund managers expect that investors will benefit from investing in long-term bond and income funds having an investment horizon of 18-24 months.

However, investors with short-term view should continue to look at investing in medium-term funds, insist fund managers.

In the last calendar year, the repo rate was reduced by 125 basis points (100 basis points = 1%) to 6.75%. Dwijendra Srivastava, CIO-debt at Sundaram Mutual Fund, said, “There are some short-term concerns, but over medium- to long-term, longer debt funds still remain attractive. However, given the scenario, we see a rate cut of 25 basis points only after the Budget. Having said that, I think the 10-year bond yields will come down by 25-30 basis points by the end of the current financial year.”

Prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and prices of fixed income securities are inversely proportional. When interest rates decline, prices of fixed income securities increase. Similarly, when there is hike in interest rates, prices of fixed income securities come down.

On Tuesday, the 10-year benchmark government securities (G-Sec) yields closed at 7.849%. “The RBI is rightly waiting for the government’s fiscal response. Although a small fiscal slippage is unlikely to impinge on inflation, the need to maintain the fiscal discipline is imperative to keep the investor sentiment buoyant. If the RBI is convinced about the government’s intention of keeping spending under check and still provide some investment boost, given that it remains in accommodating mode, we expect an inter-meeting cut post the Budget of 25 basis points. Thus taking the repo rate to 6.5%; 1.5% higher than its 5.0% March 17 CPI target,” said Murthy Nagarajan, head of fixed income at Quantum Asset Management Company.

Fund managers say the main trigger for the rate cut would be the Budget. “Even now, long-term products look attractive and if one is serious they can look at products that have average maturity of 12-15 years as they will gain as interest rates start coming down,” said a debt fund manager of condition of anonymity.

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