Spotlight on short-duration debt funds

Against this backdrop, industry executives say funds of a shorter duration bode well for investors.

© Provided by The Financial Express
Against this backdrop, industry executives say funds of a shorter duration bode well for investors.

By Siddhant Misra

Fund managers see debt mutual funds (MFs) offering the opportunity to investors to build their fixed-income portfolio, following Wednesday’s 25-bps rate hike by the Reserve Bank of India.

The policy followed what was an active week for debt market players, coming on the heels of the Union Budget and the FOMC meeting.

With the RBI maintaining its ‘withdrawal of accommodation’ stance, rate hikes could continue. Amandeep Chopra, head (fixed income), UTI AMC, said the status quo on policy stance was a surprise, though warranted in the backdrop of global uncertainty, sticky core inflation, and an upward-sloping CPI inflation trajectory in FY24.

“The RBI has clearly articulated it would want a decisive moderation in inflation, and the present reduced size of rate hike provides an opportunity to evaluate effects of past hikes. We think this policy clearly rules out any rate cuts in the near future,” said Chopra.

Against this backdrop, industry executives say funds of a shorter duration bode well for investors. “The current yield curve presents material opportunities in the short-to-medium term space. For those with a medium-term horizon (3+ years), incremental allocations to duration funds may offer significant risk-reward opportunities. Money market strategies continue to remain attractive, offering competitive ‘carry’ and low volatility for those with short-term horizons (6 months to 2 years),” said R Sivakumar, head (fixed income), Axis MF.

At the same time, the extent of impact of a rate hike invariably depends on the tenure, with funds of higher tenures witnessing a bigger impact. Experts say one’s risk appetite, too, comes into play.

According to Puneet Pal, head (fixed income), PGIM India MF, this is the right time for investors to start building their fixed income portfolio. “We recommend investors to increase investments in the short duration category (4-6 years) with predominant sovereign holdings, while selectively looking at dynamic bond funds as per their risk appetite,” said Pal.

Interestingly, debt funds have seen outflows in three out of the last four months, with only November seeing net inflows of Rs 3,669 crore. September, October and December saw outflows of Rs 65,372 crore, Rs 2,818 crore, and Rs 21,947 crore, respectively.

“With the central bank indicating this may not be the last hike, it could change the dynamics of debt fund markets. Investors earlier considering medium-duration funds may now look at sticking to the shorter end of the yield curve, owing to the inverse relationship between rates and bond prices,” said Kavitha Krishnan, senior analyst (manager research), Morningstar India.

Investors are likely to see a limited mark-to-market effect on the NAVs of debt MFs, given that markets had factored in Wednesday’s rate hike that was on expected lines.“Most debt MFs across tenures have seen only 3-5 basis points of yield uptick. One-year MFs are likely to get impacted most as yields in those have got revised by around 12-14 bps,” said Akshar Shah, founder of Fixed, a new fintech platform. At the same time, this is good for new investors wanting to enter the market, he added, given that they now stand to get a higher yield on debt MFs.