Fund managers recommend investors to reduce exposure to bond funds and invest in short and ultra-short term funds.
The RBI in its mid quarter policy review hiked the repo rate by 25 basis points from 7.25 per cent to 7.5 per cent, against a widely expected belief that it will keep the rates unchanged. The stock markets reacted negatively to the news with the S&P BSE Sensex ending down 382.93 points at 20,263 while Nifty dipped 103 points to 6012.
Also, the central bank reduced the marginal standing facility (MSF) rate by 75 basis points from 10.25 per cent to 9.5 per cent. RBI had hiked MSF by 300 basis points on July 15 to curtail the fall in rupee.
So, what should you tell your clients at this juncture? Cafemutual asked some leading fund managers about their recommendations to investors.
“Shorter end of the yield curve has already corrected by 100 bps following US Fed’s surprise decision on tapering off stimulus. A reduction in MSF rate by 75 bps will only bolster the softening bias. We believe that MSF rate is likely to remain same for quite some time from now. Liquidity in the system is likely to increase causing short rate to move around MSF rate. However, the real surprise was repo rate hike by 25 bps. This has caused the longer end of the curve to harden by 20 basis points. We also believe that longer end of the curve is likely to be elevated for quite some time. Currently fixed maturity plan of one to two year horizon and short term bond funds look attractive for investment opportunities in fixed income,” says Alok Sahoo, Head of Fixed Income,Baroda Pioneer AMC.
Lakshmi Iyer, Head, Fixed Income and Products, Kotak AMC suggests investors to invest in short and ultra-short term funds. “This would mean lower shorter term rates going forward. We believe that short term and ultra-short term funds seem well poised to capture further drop in MSF rates going forward. The minimum suggested horizon for ultra-short term would be 3-6 months while for short term funds it would be 6-12 months,” says Lakshmi.
Shriram Ramanathan, Head – Fixed Income, L&T Investment Management recommends investors to reduce exposure to bond funds. “Given that RBI’s policy stance would continue to be data dependent and hence volatile, we would recommend investors to consider reducing exposure to bond funds which are maintaining very high duration as these would continue to see high levels of risk without commensurate reward. Instead allocate more to short term and accrual oriented funds which still have attractive yields but with relatively limited risk have scope for some capital gains as and when RBI phases out more of the liquidity tightening measures,” says Shiram.
