Gold Silver Reports — US Rate Hike a Risk — Investors in mutual fund debt funds may earn 9-10% returns in the next one year, higher than most fixed income instruments such as deposits and PPF. An abovenormal monsoon, and low food and fuel prices will lead to lower inflation, which could pave the way for rate cuts by RBI. Investors could buy medium-term and dynamic bond funds to gain from the pros pect of falling interest rates. The bond market is betting on a 25 basis points (bps) cut in repo rate on Tuesday . “We believe the RBI could cut rates by 50-75 basis points over the next one year,“ says Rupesh Bhansali, head (distribution), GEPL Capital.
The central bank has cut repo rate by 150 basis points since January 2015. Bond yields did not fall in response to monetary easing till Raghuram Rajan was the RBI governor. Yields and prices move in opposite direction: when yields fall, prices rise and vice versa. Since Rajan announced his intention not to continue as the central bank chief, yields have declined.
Fund managers said factors such as good monsoon, better liquidity and easing food inflation have also helped investor confidence. “After two consecutive drought-like years in the past, the monsoon in the current year has been reasonably good. Food prices, which started to moderate, are expected to remain low with increased food production in the coming months,“ said Sujoy Das, head fixed income, Invesco Mutual Fund. He said with oil prices holding at current levels or being within a moderate range, the upside risk to inflation on account of any reversal in commodity prices is lower, which will help RBI cut rates.
Kunal Valia, director investment products, wealth management division, Credit Suisse Securities, said investors could look at a mix of short to medium-term debt funds and dynamic bond funds, with a time frame of 2-3 years.
Dynamic bond funds enable fund managers to move into short or long-term bonds depending on their outlook on interest rates. So, when they expect rates to fall, they increases exposure to long-term bonds.Else, they would buy shortterm bonds. Distributors believe dynamic bond funds, which offer flexibility in fund management, would help investors.
However, wealth managers advise investors to temper down return expectations from debt funds this year.
The risk for investors is from the possibility of rate hikes in the US. Wealth managers believe if rates in the US move up, any possible gains from rate cuts in India would get negated.Hence, to shield the portfolio, they recommend a mix of short to medium-term funds and dynamic bond funds.
Investors have earned as high 11.6% from the dynamic bond fund category over the past year. “They could earn 9-10% returns from dynamic bonds over the next one year,“ says Bhansali of GEPL Capital. He recommends IDFC Dynamic Bond and Kotak Flexible Bond among dynamic bond funds and Birla Medium Term Fund and Reliance Corporate Bond Fund in the medium-term funds category. — Neal Bhai Reports