Fund managers recommend actively managed duration funds to investors with a time horizon of 12-18 months.
The Reserve Bank of India (RBI) in its mid-quarter policy review slashed the repo rate by 25 basis points to 7.50% which was widely expected in the market. The reverse repo rate now stands at 6.50% while the cash reserve ratio (CRR) remains unchanged at 4%.
Repo rate is the rate at which banks borrow from RBI and Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. CRRis the percentage of banks total deposits which banks have to keep with RBI in the form of cash. The RBI uses CRR to drain out money from the system.
Cafemutual spoke to leading fund managers to get their views on the latest RBI move.
Rahul Goswami, CIO-Fixed Income, ICICI Prudential AMC suggests investors to look at income funds. “We continue to recommend the 2-5 year maturity space for better risk adjusted returns and income funds for benefiting out of reducing interest rate environment though with some volatility.”
Hemant Rustagi of Wiseinvest Advisors suggests investors to avoid gilt funds. “It’s a good idea to lock-in money in 13 month – 2 year FMPs as the rate cut cycle has begun. Investors can also benefit from the double indexation benefits associated with FMPs. Investors could look at investing in a mix of duration and dynamic bond funds.”
Amit Tripathi, Head – Fixed Income, Reliance Mutual Fund suggests investors to enter open ended debt funds like income and dynamic bond funds with a 12-18 month time horizon. “We expect the rate cut softening bias will continue. Income funds are better placed as they invest in both government securities and corporate bonds than investing in gilt funds at this juncture. The yield curve is likely to come down and there will be intermittent volatility.”
Lakshmi Iyer, Head of Fixed Income & Product at Kotak Mutual fund says that investors with 12-18 month horizon could invest in actively managed duration funds. For investors looking at shorter horizons, Lakshmi suggest short term funds, which predominantly invest in corporate bonds.
“From the fixed income investor`s point of view, in spite of the current rate cut the short term yields will fall in line with rate cuts only in April. Higher demand for funds will keep short term rates higher till March end. The return on the liquid funds will fall in sync with the market conditions which will be 75-80 bps lower in April compared to current returns. This makes a case for the investors to consider the funds with investment horizon of 2-3 months to garner substantially higher returns vis-à-vis liquid funds. At the longer end of curve the yields will subdue slowly and steadily, so the long duration products might fetch good returns with the view of next 6 months,” says Yadnesh Chavan, Fund Manager, Fixed Income, Mirae Asset Global Investments.
