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Invest In short term and medium term funds
This financial year, retail investors are likely to benefit by investing in short- term and medium- term debt funds. With the Reserve Bank of India ( RBI) keeping key rates unchanged and indicating a rate cut is unlikely in the near term, long- dated bonds aren’t likely to see much action.
Investing in funds with an average maturity of twothree years will be profitable. Vidya Bala, head ( mutual funds research), FundsIndia. com, says, “ Short- term funds could provide sufficient opportunities at this juncture. Longer- dated bonds have not received any signal for any particular rally from the policy. And, these might not receive any such signal in the near term, too.” Also, as rates at the shorter end of the curve are higher than at the longer end, in case of a rally ( if there is a rate cut), gains will be higher at the shorter end, he says.
As on March 31, the yield on the 10- year government security stood at 8.8 per cent, while that on the 10- month certificate of deposit was 9.18 per cent. The yield on the 10- month commercial paper was 9.6 per cent.
RSivakumar, head ( fixed income), Axis Mutual Fund, says this is a good time for investors to invest in debt funds because liquidity will improve. Rather than fixed maturity plans, which are passive funds, investors could look at dynamic bond funds, provided they are prepared to remain invested for at least a year and a half. For such funds, the managers will be able to adjust the average maturity of the fund, depending on the interest rate movement.
“For debt mutual fund investors, the positives are as inflation falls, bond yields will rise. That is why investors can benefit more from actively- managed funds,” he adds.
For now, Bala recommends investing in ultra short- and short- term debt funds. One could also opt for dynamic bond funds. But he cautions against funds that have an average maturity exceeding six years. “ There is likely to be alot more activity at the short end of the rate curve, such as in the commercial paper market because of the 14- day repos. And, yields will be higher where liquidity will be higher,” he says.
Santosh Kamath, chief investment officer ( fixed income), Franklin Templeton Investments India, recommends accrual focused funds that could help investors tackle the current uncertain environment. “ Investors with ahigher risk appetite and a longer- term horizon could look at long- dated/ gilt- focused funds,” he says.
With about 60 per cent of the government borrowing scheduled for the first half of this financial year, the markets expect a large supply of government paper. Therefore, government bond yields have not seen a drop commensurate to the recent sharp drop in inflation, Kamath says.
But gilt funds are only for those who can stomach volatility in their portfolios, cautions Sujoy Das, director and head of fixed income, Religare Invesco Mutual Fund. Instead, he suggests income funds. “ Apart from the dovish tone of Tuesday’s RBI policy, other positives are the stability in the current account deficit and a stable rupee.
The quantum of dividend shall be Rs 0.0389 per unit. The record date has been fixed as April 03, 2014.
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