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Medium-term debt funds become attractive

The benchmark 10-year paper traded at 7.30%, up around 15 bps compared to Thursday.

The other option for investors is to adopt a ladder strategy with some short-duration funds and some medium-duration funds, such as corporate bond funds, in the debt portfolio, Bala said.
The other option for investors is to adopt a ladder strategy with some short-duration funds and some medium-duration funds, such as corporate bond funds, in the debt portfolio, Bala said.

By Ashley Coutinho

This could be a good time for mutual fund investors to look at medium-term debt funds, given the 50-basis-points rate hike by the RBI on Friday.

The markets, in the build up to the policy, had expected a rather dovish stance, and yields across the board cooled off ahead of the policy. The half-a-percentage hike caught participants off guard, resulting in the 10-year government securities retracing past gains almost completely. The benchmark 10-year paper traded at 7.30%, up around 15 bps compared to Thursday.

“Yields are peaking and for buy-and-hold investors this can be a good time to lock into medium-term products with around four-five-year tenure. Target maturity funds with a passive strategy are also a good bet. This is possible if people are able to align their timeframe to four-five-year maturity and also ride out near-term volatility,” said Vidya Bala co-founder, Primeinvestor.in.

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The other option for investors is to adopt a ladder strategy with some short-duration funds and some medium-duration funds, such as corporate bond funds, in the debt portfolio, Bala said.

A note by Axis MF said the current yield curve presents material opportunities for investors in the four-year segment. This category also offers significant margin of safety given the steepness of the curve.

“For investors with medium-term investment horizon of three or more years, incremental allocations to duration may offer significant risk reward opportunities. For investors with short-term investment horizon of between six months and two years, money market strategies continue to remain attractive offering competitive carry and low volatility. Credits can also be
considered as ideal solutions in the current environment,” the note said.

Market watchers believe that debt funds are becoming a more attractive option for investors vis-a-vis bank fixed deposits. One-year bank FD rates for top banks now range between 5% and 5.5% while debt funds of similar duration are fetching 6.5%. AAA-rated corporate bonds with two-year maturities are fetching 7-7.5%.

“Investors should start looking at actively managed lower-duration funds, where fund managers can elongate the maturity if required. Conservative investors can look at roll-down products in the one-year-and-below bucket. Those with a longer horizon can look at short-duration funds with a tenure of between one and three years,” said Dwijendra Srivastava, CIO – fixed income, Sundaram MF.

Experts believe that the rate hike cycle could last for six to nine months, with the market pricing in a terminal repo rate of 6-6.25%.

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