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MF News Go for accrual and short-term bond funds

Go for accrual and short-term bond funds

RBI has left the key policy rates unchanged.
Team Cafemutual Feb 7, 2018

The RBI in its bi-monthly policy review today kept the repo rate unchanged at 6% and continued with the neutral stance.

Experts say that investors should stay away from long term bond funds and go for accrual funds and short term funds.

Here is what they had to say.

Amit Tripathi, CIO – Fixed Income Investments, Reliance Mutual Fund

The tone in the policy was very balanced. The RBI is more focused on medium term drivers of growth and inflation, and wants to support the nascent recovery. The markets are pricing in many risks that RBI highlighted in its policy. Given RBI’s pragmatic approach and current market levels, one can expect some near term stability in bond yields, which have been very volatile of late.

The overall macro resilience of the economy remains high. However, we are clearly no longer in a rate easing cycle. Investors should prefer moderate duration portfolios with reasonable carry (accrual) for the bulk of their fixed income allocations.

R.Sivakumar, Head-Fixed Income, Axis Mutual Fund

We expect long bond yields to be range bound. However, the lack of a negative is not a positive, and even at current levels, we do not see value in long bonds given the duration risk involved.

Short rates have also sold off in recent months, with the 1-year certificate of deposit now yielding about 7.5% (compared to 6.5% in November). The entire short end of the curve (1-5 years) now appears to have “overpriced” the risk of tight liquidity and RBI policy stance. We see better value in this segment. Moreover, as the broad macro economy improves, we are also seeing improvement in corporate earnings, which is positive for corporate bonds – especially in the non-AAA space. 

Investors with a medium term holding horizon should look to short and medium term funds, while those with a short-term holding period should consider liquid and ultra-short funds.

Pankaj Sharma, CIO- Fixed Income, DSP BlackRock Mutual Fund

In lines with market expectations, RBI has kept rates unchanged and maintained the neutral stance. The status quo on rates and a neutral stance indeed reflect a repeat of the balanced tone as witnessed in the December MPC. That said, we believe that macro variables have moved towards the negative territory over the past 2 months as factors like crude oil, yields in developed markets moving higher, fiscal slippage on the domestic front and prospects of change in MSP mechanism do not augur well for interest rates to head lower.

Hence, we maintain a bias for reversal in the interest rate stance sooner than later. Bond yields have been pricing the same and this policy for now will resist hardening of yields from current levels.

From a market perspective, the outcome of the policy is in line with market expectations and hence the immediate reaction is relatively muted.

Lakshmi Iyer, CIO (Debt), Kotak Mutual Fund

The market was slightly circumspect in light of fiscal slippage and was expecting a stern stance. In contrast, the RBI came with status quo accompanied by a milder stance. This came as a sigh of relief for an excessively bearish market. We believe that the central banker’s policy stance would be increasingly data driven and were the crude prices to behave favourably; we may be in for a long pause.




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