RBI governor Raghuram Rajan's decision to cut the repo rate by 25 basis points is sure to result in some cut in interest rates in bank fixed deposits (FDs), making it tougher for risk-averse investors who depend on interest income to meet their expenses. In such a situation, debt investors willing to take aslightly higher risk can opt for debt mutual funds to earn returns which could be higher than FD rates, fund managers said. Ritesh Jain, CIO, Tata Mutual Fund, and Rahul Goswami, CIO-Fixed Income, ICICI Prudential MF, both said that the time was ripe for investors to look at short- and medium-term bond funds, which invest in debt instruments of two-five years maturity.
Investors could also invest in mutual funds schemes which have higher yielding bonds in their portfolio. These schemes are called accrual funds. In short- and mediumterm bond funds, investors can expect 8-8.5% yearly returns, while in accrual funds it could be even higher.
Fund managers also pointed out that when the rate of interest in the economy is at a high level and it starts falling, the prices of bonds, which are inversely related to yields, start rising. In such a situation, investors can profit from the rising price of bonds.
