How to build a fixed income portfolio when rate cuts look a bit too far

Investors looking to allocate money in fixed income schemes should stick to debt funds that invest in short-term and medium-term paper only with the Reserve Bank of India (RBI) seemingly in no hurry to cut interest rates.

“There is not rate cut visibility for the next six months. Investors would be better off playing accrual strategy than duration," says Rupesh Bhansali, head (distribution), GEPL Capital. This will help preserve capital and prevent erosion of returns. Bhansali recommends investors put their money only in short-term and medium-term debt funds and stay away from long-term gilt funds. Ever since the RBI changed its policy stance to "neutral" from "accommodative" in February, duration funds have taken a hit. Data from Value Research show that the Dynamic Bond Fund category has lost 1.13% over the last three months, while the medium- and long-term gilt category has lost 1.51%.

Last week, the RBI held the repo rate unchanged at 6.25% and also maintained its neutral monetary policy stance.Fund managers believe the 25 basis point increase in the reverse repo rate is a calibrated move to ensure better liquidity and interest rate management.

“The 4% inflation target needs to be achieved between 2017 and 2021, but the RBI seems intent on delivering it in a durable manner on a sustained basis and hence we expect no further repo rate cuts by the RBI. They would maintain a neutral stance with a long pause at 6.25% with a bias towards rate hikes on foodcommodity price inflation,“ says Arvind Chari, head (fixed income) at Quantum Asset Management.