With the central bank RBI deciding to maintain a status quo on key policy rates on Wednesday, debt fund managers are advising investors to stick to short-term debt funds in the coming weeks.
The RBIs status quo was positive for the market as it brought in a lot of investors sitting on the sidelines back to the debt funds, especially short term funds, said Dwijendra Srivastava, head fixed income, Sundaram MF.
According to experts, investors should look to invest in shorter tenure debt funds given the easing short term liquidity and the status quo on interest rates at present. The RBI statement indicates that the banks have not been tapping the MSF window, which means there is ample liquidity in the system. In this scenario, yields of short-term instruments up to 1-year treasury bills will continue to soften, thus triggering a price rally in ultra short-term and short-term debt funds, said Vidya Bala, head - mutual funds research, FundsIndia.com.
Short term and ultra short-term debt funds have been enjoying a good run of late, with both these categories giving the most returns for both one-month and three-month periods, data from Value Research shows.
On Wednesday, yields of 10-year government bonds came off by about 10 bps which, according to experts, has helped recoup losses in gilt and other long tenure debt funds accrued over the last week. However, experts believe this may not be the right time to enter these funds. While the status quo on key policy rates provided some relief for long-dated gilts, investors may view this more as a relief rally. Given the rate uncertainty, there could be little trigger for gilt yields to come off sharply, said Bala.
Market observers believe that the long-term bond yields are likely to remain volatile in the coming weeks. The outlook for policy remains uncertain, given the conflicting inflation and growth trajectories, and tough external environment. Over the near term, bond yields will be driven by global news flow, in particular, the US FOMC decision, and local economic data, said Santosh Kamath, CIO fixed income, Franklin Templeton Investments India.
Some debt fund managers believe that conservative investors could also look at investing in fixed maturity plans (FMPs) as 1-year CD rates remain attractive at over 9%.
The RBI kept the repo rate unchanged at 7.75% on Wednesday despite expressing concerns about persistent rise in inflation at both, wholesale and retail levels.