Time to Go Slow on Du­ra­tion Funds

Wealth man­agers ex­pect only one more rate cut, ad­vise look­ing at ac­crual funds

The Economic Times - - Money -

Mumbai: Af­ter earn­ing dou­bledigit re­turns from fixed in­come funds over a three year pe­riod, in­vestors may need to brace for lower re­tur ns in the com­ing years. Wealth man­agers and an­a­lysts are ad­vis­ing fixed in­come in­vestors to re­duce the pro­por­tion of du­ra­tion funds from their port­fo­lio in favour of ac­crual funds af­ter the Re­serve Bank of In­dia (RBI), in its pol­icy re­view meet­ing on Wed­nes­day, sig­nalled it may not be in a hurry to cut in­ter­est rates.

“We are at the fag-end of the rate cut cy­cle and there could just be one more rate cut,” said Vidya Bala, Head (re­search), fundsin­dia.com. Bala rec­om­mends in­vestors to switch from gilt funds—a prod­uct that in­vests in gov­ern­ment se­cu­ri­ties —which­have­been­top­per­form­ersin the fixed in­come cat­e­gory in the last three years, to short-term ac­crual funds such as credit op­por­tu­nity and cor­po­rate bond funds, where the fo­cus is on earn­ing in­ter­est in­come and rate-re­lated risks. She rec­om­mends HDFC Medium Term Op­por­tu­ni­ties Fund and UTI Bank­ing and PSU Fundtofixed­in­comein­vestor­switha 1-2 year time frame.

“In­vestors should po­si­tion their port­fo­lios to­wards ac­crual strate­gies as no sig­nif­i­cant rate cuts are ex­pected from here on,” says Vishal Dhawan, chief fi­nan­cial plan­ner, Plan Ahead Wealth Ad­vi­sors.

The RBI, while cut­ting the repo rate by 25 ba­sis points on Wed­nes­day, main­tained its neu­tral rat­ing.

“The Re­serve Bank has opted to cut rates, but has main­tained a neu­tral stance of pol­icy – pre­fer­ring to wait for fur­ther data to de­cide if rates should be fur­ther re­duced,” says R Si­vaku­mar, head (fixed in­come), Axis Mu­tual Fund. Dhawan rec­om­mends in­vestors to raise the pro­por­tion of ac­crual funds in their port­fo­lio to 66% from the ear­lier 50%, and re­duce the pro­por­tion of dy­namic bond from 34% to 25%. Dhawan rec­om­mends Birla Sun­life Short term fund and HDFC Medium Ter m Op­por­tu­ni­ties fund and in the dy­namic fund cate- gory rec­om­mends IDFC Dy­namic Bond Fund.

Ac­crual funds fo­cus on earn­ing in­ter­est in­come from the coupon of­fered by bonds they own, while du­ra­tion funds look at earn­ing in­come through both cap­i­tal ap­pre­ci­a­tion when in­ter­est rates de­cline. Though they can earn some re­turns from cap­i­tal gains, it is typ­i­cally small in pro­por­tion to their to­tal re­turns.

In the last three years, in­vestors have ear ned 10.57% from the Dy­namic Bond cat­e­gory, 10.27% from credit op­por­tu­ni­ties and 11.92% from long term gilt cat­e­gory, as per data from mu­tual fund tracker Value Re­search. Wealth man­agers ad­vise in­vestors to lower their re­turns ex­pec­ta­tion to 7-8.5% as cap­i­tal ap­pre­ci­a­tion will be lower and in­vestors can now earn re­turns only from in­ter­est ac­crued on bonds.

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