Debt fund managers believe investors should continue to look at short-duration funds as the Reserve Bank of India (RBI) has kept the policy rate unchanged. Investors looking to invest for more than three years in debt funds could invest in dynamic bond funds.
According to Mahendra Kumar Jajoo, head – fixed income at Mirae Asset Global Investments (India), “Markets were expecting at least a 25 basis rate cut as growth numbers were poor. But the central bank focused on inflation. I don’t foresee any rate cuts in this financial year as inflation is likely to remain at elevated levels. Given the current situation investors should look at short-term funds like liquid or low duration funds if they have investment horizon of 18-30 months months.” He added that investors looking to invest for more then three years should look at dynamic bond 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 and one year. In the past one year, short-duration category has given returns of 5.69%, show data from Value Research. Other categories such as liquid funds and ultra short-term funds have given returns of 6.54% and 6.84%, respectively, in the last 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 hike in interest rates, the prices of fixed income securities come down. On Thursday, the 10-year benchmark closed at 6.61%. Market participants are expecting 10-year G-Sec yields might go to 6.75% by end of this financial year.
“From an investment point of view, the liquidity trade is largely over. ‘AAA long’ corporate bonds currently offer attractive investment opportunities for long-term investors looking to lock in rates. As the economy revives, albeit gradually and given the headroom available today on account of the steepness in the yield curve, we believe this strategy is likely to remain attractive as compared to short term strategies and tax free bonds. Short-term strategies, however, still offer opportunities for volatility averse investors,” said R Sivakumar, head – fixed income at Axis Mutual Fund.