RBI has slashed the repo rate by 25 basis points from 6.5% to 6.25%. The reverse repo rate and bank rate have been adjusted to 5.75% and 6.75% respectively.
We asked experts what it means for investors. Here’s what they have to say.
“Investors can invest in short to medium term funds based on their risk appetitive. Since further rate cut is expected by the end of this financial year, we expect longer duration funds/gilt funds to outperform. So investors can invest in a combination of short to long duration funds to gain from further rate cuts. The allocation to long duration should not be more than 10-15% of the investible corpus,” says Lakshmi Iyer, Head – Fixed Income & Products, Kotak Mutual Fund.
In a declining interest rate scenario, fund managers focus on generating returns from the capital appreciation that occurs when interest rates decline. Income, gilts & dynamic bond funds adopt duration strategy.
Amit Tripathi, CIO – Debt, Reliance Nippon Life AMC expects another rate cut by the end of this fiscal and recommends investors to invest in accrual funds if they have three-year time horizon. “We believe investors with one-year time horizon can look at duration funds. Investors with a three-year horizon can invest in accrual funds. As interest rates fall, carry will be the important driver of returns. Investors with more than three-year time horizon can recalibrate their portfolio over the next 2-3 months towards accrual products.”
In accrual funds, fund managers focus on generating returns through accrual of interest on the bonds they hold. Short term funds and FMPs deploy accrual strategy.
Dwijendra Srivastava, Chief Investment Officer – Debt, Sundaram Mutual Fund says that investors with a longer term horizon, ideally 7-8 years, can invest in gilt funds. “We are not advising investors to invest in longer duration funds with a short term horizon. For instance, anyone looking at generating retirement income can invest in longer duration funds because interest rates are expected to move down in India.”
Vidya Bala, Head - Mutual Fund Research, FundsIndia.com says, “While periods of quick returns may be past us, we think this could be among the last entry points for investors looking to participate in the interest rate rally with an 18-24-month time frame. Dynamic bond fund category can provide sufficient opportunities while cushioning risks associated with duration calls.”
In its policy statement, RBI said that the decision of the monetary policy committee (MPC) is consistent with an accommodative stance of monetary policy with the objective of achieving consumer price index (CPI) inflation at 5% by Q4 of 2016-17.
“While the street was divided on the decision, the MPC noted that the food inflation momentum has turned downwards on the back of good monsoons and government effort on supply management to contain food prices especially pulses. The committee expects that easy liquidity condition should help smoothen transmission of rates through the economy. The accommodative policy stance is likely to continue, with continued fall in inflation likely to create further space for monetary policy action,” says Avnish Jain, Head – Fixed Income, Canara Robeco Mutual Fund.
The next meeting of the committee is scheduled on December 6, 2016.
