Bond and gilt funds offer a good investment opportunity for over the medium term, say Fund Managers.
The Reserve Bank of India (RBI) kept its key policy rates unchanged in its mid quarter policy review on December 18, at the same time shifting its focus to growth in the view of moderation in wholesale price inflation. The central bank kept the cash reserve ratio (CRR), the portion of cash which banks have to keep with RBI unchanged at 4.25 %. It kept the repo and reverse repo rates unchanged at 8% and 7% respectively, contrary to the expectation of some economists that RBI may cut its key rates this time. Repo rate is the rate at which banks borrow funds from RBI while reverse repo is its opposite.
The RBI expects inflation to ease in the coming months leading to a shift in its focus to growth in its upcoming third quarter policy review in January 2013. Most experts are expecting a repo cut of 50 to 100 basis points next year. “Recent inflation patterns and projections provide a basis for reinforcing our October guidance about policy easing in the fourth quarter. However, risks to inflation remain and accordingly, even as the policy emphasis shifts towards growth, the policy stance will remain sensitive to these risks,” stated RBI.
So what should advisors be telling their clients at this juncture? Fund managers were not expecting a rate cut and hence not many have rejigged their portfolios. They are recommending bond funds till the RBI cuts its policy rate.
“We were maintaining a reasonably invested portfolio ahead of the policy and continue to maintain the same post policy given our positive outlook on the markets. With the outlook on growth being benign and inflation trajectory on the lower side, we believe there could be a case for lowering interest rates in the months ahead. In this scenario, we would continue to recommend actively managed bond and gilt funds to investors with a 12-18 months investment horizon,” said Lakshmi Iyer, Sr. Vice President and Head, Fixed Income, Kotak Mutual Fund.
Killol Pandya, Head-Fixed Income, Daiwa Mutual Fund believes that dynamic PSU bond funds can provide an attractive opportunity at this juncture. “We were not expecting a repo rate cut so we had not changed our portfolios. Investors should take a call based on their time horizon and risk appetite. They can invest in income and bond funds only if they have a time horizon of more than six months. Dynamic bond fund with a skew towards PSU papers are better placed now. Gilt funds are more aggressive and more sensitive to interest rate movements and hence are suitable for investors with a higher risk appetite and a time horizon of more than six months,” said Killol.
Ganthi Murthy, Head – Fixed Income at Peerless Mutual Fund also advises investors to invest in duration based bond funds and gilt funds. “Bond funds will give better return over the next six to nine months. Gilt funds will also do well.” said Ganthi.
Fund managers expect to see further inflows coming in gilt funds in the next few months. Investors parked Rs 11567 in gilt funds this year in expectations of a rate cut from RBI. Gilt funds benefit from a fall in interest rates as bond prices move up.
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