Fund managers expect investors to gain from medium to longer term funds

Mumbai, June 7: The Reserve Bank of India (RBI), in its second bi-monthly policy, kept the key rates unchanged. However, fund managers expect that investors will benefit from investing in medium to longer term funds having an investment horizon of next 1824 months. However, investors who have short-term view should continue to look at investing in short-term funds, insist fund managers.

Since the start of rate cut cycle, RBI has cut repo rate down by 150 basis points (100 basis points=1%) to 6.5%. “The policy statement was largely on expected lines. Upward inflation at present is increasingly a concern for RBI. But RBI’s recognition of improvement in supply side management and expectation of good monsoon shows that central banker is seeking means for further accommodation in rates if circumstances turn opportune. However, even now we believe liquidity outlook is favorable and investors who are investing in longer duration funds should continue doing it. But, at the same new investors should also go overweight on shorter duration of funds,” said Lakshmi Iyer, chief investment officer (debt) & head products, Kotak Mutual Fund.

The prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and price of fixed income securities are inversely proportional. When interest rates decline, the prices of fixed income securities increase. Similarly, when there is hike in interest rates, the prices of fixed income securities come down.

On Tuesday, the new 10-year benchmark government securities (g-secs) closed at 7.48%. “Going forward, a lot will depend on monsoon and its impact on inflation. However, rate cuts will be data-driven and if inflation remains at lower side, we might see one or two rate cuts in the next 12 months,” saidRSivakumar,headof fixed Income at Axis Mutual Fund. He also added that 10-year yield will come down in the range of 7-7.25% in the next 12 months.

Some industry players also think that, investing in accrual funds can be also looked by investors at this point of time. “Possibility of any rate cuts can be expected only after we have strong monsoons. In such time risk averse investors should look into short tenure debt funds. But investors who wants to get into long ter m debt products and even should know that, such funds are directly aligned with benchmark interest rates and investors might witness volatility given the duration of the products. They should invest in longer duration funds only they have investment horizon of more than three-five years,” said a debt fund manager from the top fund house.