Debt fund managers advocate investment in short duration funds, with another 50-75 basis points of rate hike expected in the current financial year.
The RBI hiked the repo rates by 50 basis points last week, in line with market expectations and maintained its CPI inflation projection at 6.7%, while lowering its GDP growth projection for the current financial year.
“The short duration funds seem suitable in the current scenario. As yields at the shorter end may continue to inch up due to liquidity normalisation through SDF and expected hikes in forthcoming policies. For less than 1-year investment horizon, ultra-short duration fund seems more suitable,” said Mahendra Jajoo, CIO — fixed income, Mirae Asset Investment Managers (India).
The yield curve is currently flat and there is not much additional compensation in terms of higher yield for the additional duration risk at the longer end of the curve, according to experts.
Also Read: Life insurers’ new business premium income grows 38% in H1
“The yield curve is flat after three years. We recommend investors based on their time horizon. For one month, investors can look at ultra short term bond funds, 1 to 2 months in money market funds, 2 to 4 month, 4 to 6 months in floating rate funds, 6 months in short term bond funds. Investors having a one year view can invest in gilt funds,” said Murthy Nagarajan, head of fixed income at Tata Mutual Fund.
The US Federal Reserve may remain hawkish over the next few policies and the MPC is widely expected to follow this stance and raise rates by another 35 basis points in December.
“The current yield curve presents material opportunities for investors in the short to medium term space. For investors with medium term investment horizon of three years or more, 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 and low volatility,” said a recent note by Axis Mutual Fund.
Experts believe that inflation may cool off and policy rate hikes will continue till there is visibility on the inflation glide path.
“We would recommend products having a duration of up to 4 years, as we believe that they offer a better risk reward opportunity to investors. Though rates and yields can still go higher, at the current yield of 7.20% plus, short duration products offer a decent spread over the future expected inflation, which is likely to come down to 6% over the next one year,” said Puneet Pal, head of fixed income at PGIM India MF.