Fixed income investors can switch to corporate bond funds for the short term

Mumbai: Fixed-income investors seeking steady returns with low volatility may consider corporate bond funds, as expectations of a pause in interest rate cuts and rising inflation risks favour shorter-duration accrual strategies.

Bond markets have already turned volatile in recent months following the onset of the West Asia conflict.

The benchmark 10-year bond yield climbed from 6.68% on March 2 to a high of 7.12% on April 3. Of late, it has hovered around the 7% mark.

With yields at elevated levels, funds that invest in bonds that mature in the near term and fetch interest income (accrual), rather than those betting on interest rate movements, appear favourable, said money managers. "Yields are now closer to the peak levels seen in the last cycle. This makes the corporate bond fund category attractive even in a scenario where interest rates move higher," said Manish Banthia, chief investment officer - Fixed Income, ICICI Prudential Mutual Fund. Banthia said such funds continue to offer healthy accrual opportunities along with a degree of defensiveness in portfolio performance.

Corporate bond funds currently offer yields in the range of 7-7.5%, depending on the mix of AAA and AA-rated securities, providing a 50-80 basis point spread over government securities. This is higher than the 3-year bank fixed deposit rates of around 6.25-6.59%.

"Inflation faces notable upside risks stemming from elevated crude oil prices, rupee depreciation-induced import cost pressures, and the potential adverse effects of El Nino on domestic food prices," said Rahul Goswami, CIO & MD, India Fixed Income, Franklin Templeton Mutual Fund.