Stick to short-term debt funds & FMPs, say fund managers

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Fe Bureau | Published: August 2, 2018 12:59:26 AM

The RBI on Wednesday raised the key repo rate by 25 basis points to 6.50%. This is the second hike in the key policy rate in 2018-19 after the 25 basis points increase in June.

Stick to short-term debt funds & FMPs, say fund managers

Following a hike in repo rate by the Reserve Bank of India (RBI) in its bi-monthly monetary policy and expectations of two more rate hikes in the current financial year, fund managers insist that investors should stick to short-term debt funds. Apart from these funds, the investors can also opt for dynamic bond funds and fixed maturity plans (FMPs) in the current scenario, say fund managers.

The RBI on Wednesday raised the key repo rate by 25 basis points to 6.50%. This is the second hike in the key policy rate in 2018-19 after the 25 basis points increase in June.

R Sivakumar, head of fixed income at Axis Mutual Fund, said: “From the investors’ point of view, they should stay invested in the shorter duration funds which can be AAA rates short-term funds or credit products. We still believe that one should remain invested in products below three-year duration.” He added that 10-year yields should be hovering around 7.70%-7.90% in the next six months.

On Wednesday, 10-year benchmark Government Securities (G-Sec) closed at 7.701%. “I would say that two back-to-back rate hikes are a fairly strong signal from the RBI that they (RBI) are quite hawkish and will be looking for opportunities to hike rates again. Timing is still uncertain, but I think there will be one or two more hikes in the current financial year,” added Sivakumar.

There are few types of short term debt funds such as liquid funds, ultra short duration funds, money market funds and short duration funds. While, short duration funds invest in debt and money market instruments where duration of portfolio is between 1-3 years. On the other hand, liquid funds, ultra short duration funds and money market funds have instruments maturity between 91 days to one year.

In the past one year, liquid funds category and ultra short term fund category have given returns of 6.84% and 6.47%, respectively, shows the data from Value Research. While, other categories such as dynamic bonds and long duration funds have given returns of 1.12% and 0.16% in the last one year, largely due to the volatility and rise in 10-year G-Sec yields.

Dwijendra Srivastava, CIO of debt at Sundaram Asset Management Company, says, “Investors having an investment horizon of one year should look at investing in ultra short-term funds or even liquid funds. But if their horizon is more than one year to three years, they can certainly look at FMPs at this stage.” In the last one year, the FMP category has given a return of 6.85%, according to data from Value Research.

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.

Some industry players also believe that dynamic bond funds and credit opportunities are the best bet during the current scenario. “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. 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 the top fund house.

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