Focus on short term debt mutual funds as policy standardization approaches
Anticipating a rise in interest rates in the medium term, debt fund managers advise investors to favor funds with an average maturity of around one to three years.
The Reserve Bank of India (RBI) on Friday kept its key rates unchanged, but signaled a shift towards policy normalization.
Categories such as low duration funds, money market funds and short duration funds are best suited in today’s environment, market participants say.
As the Monetary Policy Committee decided to maintain an “accommodating” stance, Sandeep Bagla, CEO of TRUST Asset Management Company (AMC) said the RBI policy was on the hawkish margin.
“RBI has recognized the strong growth and the negative surprise on the inflation front. One of the MPC members voted for an accommodating change of stance. It is quite possible that longer-term yields will gradually rise to 6.5 percent. Investors should invest in bond funds with a maturity of less than three years to minimize interest rate risk, ”Bagla added.
Generally, the prices of fixed income securities are dictated by prevailing interest rates. Interest rates and prices are inversely proportional. When interest rates fall, the prices of fixed income securities rise. Likewise, when interest rates are raised, the prices of fixed income securities fall.
As a result, longer-term debt securities are more subject to intense volatility during the period of rising interest rates.
In order to absorb additional liquidity into the system, the RBI announced the implementation of a variable rate reverse repurchase (VRRR) program due to the higher yield outlook compared to the interest rate reverse repurchase agreement. fixed day by day. The RBI has decided to gradually increase the amount of the VRRR to Rs 4,000 billion.
Pankaj Pathak, Fund Manager – Fixed Income, Quantum Mutual Fund, says we may have witnessed an emerging attempt by the RBI to “normalize” monetary policy operations.
“Over the next six months, we expect the RBI to reduce excess liquidity in the banking system. As a result, we would expect the repo rate to rise from 3.35% to 3.75%, and as growth stabilizes, a slight departure from the accommodative stance, and then a gradual start of increases. rate to narrow the gap between the short-term rate, currently below 4 percent, and current inflation (~ 5.5 percent), ”Pathak added.
Over the past year, few debt categories like money market funds, very short term duration and dynamic bonds have yielded around 4%. While medium duration and credit risk funds have delivered average returns of 6.17% and 8.13% respectively over the past year.
While there may be an increase in interest rates, fund managers also believe that investors who are willing to take a slight risk may also turn to credit risk funds at this point.
“Credit remains an attractive game for investors with a 3-5 year investment horizon, as improving business cycle and supporting liquidity alleviate concerns about credit risk, especially in quality names. superior. While we remain selective in our selection and rigorous in our due diligence, we believe the current environment is conducive to credit exposure, ”added R Sivakumar, Head of Fixed Income at Axis MF.