Fund managers recommend investing in short term and dynamic bond funds for investment horizon of less than a year and long duration gilt funds for up to three years exposure.
The Reserve Bank of India (RBI) today reduced repo rate by 25 basis points from7.5 per cent to 7.25 per cent and reverse repo by 25 basis points to 6.25 %. Repo rate is the rate at which RBI lends to banks while reverse repo is the rate RBI pays to banks to store their excess funds. The cash reserve ratio (CRR), amount which banks have to keep with RBI remains unchanged at 4%.
The central bank has indicated that there is little headroom for further rate cuts from here but fund managers expect further monetary easing if inflation comes down.
According to RBI, the wholesale price index (WPI), moderated to an average of 7.3 per cent in 2012-13 from 8.9 per cent in the previous year. The WPI eased further in Q4 of 2012-13, with the year-end inflation being recorded at 6.0 per cent.
Cafemutual asked fund managers for their advice.
Dhawal Dalal, EVP & Head – Fixed Income, DSP BlackRock Investment Managers
With the RBI reducing the repo and reverse repo rate by 25 basis points today and leaving the door open for one more rate cut, we believe that the yield curve is likely to turn steeper gradually with short-term rate falling more than long-term rates.Based on that assessment, we believe that investors with 6 months to 12 months investment horizon should consider short term funds for their investment needs subject to suitability of risk tolerance. Investors with higher investment horizon of 2-3 years should consider investing in the fixed income funds with higher duration such as bond funds or dynamic bond funds. Before investing, investors should carefully study the fund’s portfolio, its positioning and the fund manager’s views on interest rates in the near-term.
Rahul Goswami, CIO-Fixed Income, ICICI Prudential AMC
The market expectations were moderated to a 25 bps rate cut after the release of macroeconomic and monetary developments document yesterday. Given the recent decline in commodities and moderating price pressures, we believe that the average inflation and growth for FY 2014 will be lower than RBI’s projection of 5.5% and 5.7% respectively. This to our understanding will definitely provide RBI further room to take steps towards monetary easing. We have seen significant steps towards improvement in government finances and that has helped in demand side moderation. With lower growth and inflation coupled with moderating trade and current account deficit we see opportunities for the central bank to ease further and remain growth-supportive in the times to come
Lakshmi Iyer, Sr. Vice President and Head - Fixed Income, Kotak Mutual Fund
In the backdrop of moderating crude oil prices, and a possibly normal monsoon season, we can expect the inflation to be well within the tolerable threshold for some time. This may provide the RBI with further room for rate cut in the time to come. However, a sharp reversal in the Brent crude prices could again adversely impact the slowly mollifying current account deficit and inflation, and remains a key risk for the market. We believe that there could be easing of the yield curve from the current levels. Investors could look to gain exposure to short term bond funds in case of investment tenure under a year.For those looking at longer investment horizons, long duration gilt and bond funds would work better.
Killol Pandya, Senior Fund Manager – Debt, LIC Nomura Mutual Fund
I continue to favor dynamic funds and short term funds. Funds which have duration of about 2.5 to 3 may be looked at right now. I prefer portfolios having a PSU bond orientation.
The current high interest rate regime is expected to change going forward. We feel that emerging credit deposit equation will play very vital role in deciding direction of interest rates. On the longer term segment we feel that the pickup in the economic activity will give more comfort to the markets, as it will improve the fiscal situation and will also force banks to raise more deposits to fund the credit off take, which in turn will create additional demand for the government securities. Also direction of short term CD yields can remain southwards because of lack of more supply in beginning of the new financial year. The return on the short term funds will follow the movement in the CD yields. Investors can consider investing in long duration funds when the confidence on the economy will emerge based on government`s deficit management and the expectations for further rate cuts. Till the time investors can look at the short term bond funds where they can keep earning decent returns with limited interest rate risk.
Arvind Chari, Fund Manager (Fixed Income), Quantum Mutual Fund
At any time, if your investment horizon is for the short term, you should invest in short maturity funds like liquid funds FMPs, short term funds which tend to be less volatile.As longer tenor bond markets tend to be volatile and are extremely difficult for retail investors to time their entry and exit, we believe they should take exposure through dynamic bond funds.These funds have the ability to alter the duration and increase risk adjusted returns.From the monetary policy perspective, the markets had already priced in the 25 bps cut. We expect inflation to ease in the next few months and thus expect that the RBI can reduce rates further which should make investments in bond funds attractive.
