Invest in dynamic bond funds, says Pankaj Pathak of Quantum Mutual Fund

Investors with an investment horizon of two to three years and some appetite for intermittent volatility, can continue to hold or add dynamic bond funds to their portfolios, says Pankaj Pathak, Fund Manager - Fixed Income, Quantum Mutual Fund.

Dynamic bond funds have the flexibility to change the portfolio based on evolving market conditions. This makes dynamic bond funds better suited for the long-term investors in this volatile macro environment, added Pathak.



“Investors with a short-term investment horizon and with little desire to take risks, can invest in liquid funds which invest in government securities and do not invest in private sector companies which carry lower liquidity and higher risk of capital loss in case of default,” said Pathak.

Given the sharp jump in bond yields since the start of the month, much of the near-term negatives are already priced. Risk of geopolitical conflict intensifying – pushing commodity prices higher, will continue to keep investors on sidelines in the near term.

While from a medium-term perspective, outlook for bonds looks favorable supported by peaked policy rates, falling inflation trend, and favorable demand supply mix, noted Pathak in Monthly Fixed Income Outlook - November 2023.

At current yield levels, valuation also looks reasonable for medium to long duration bonds. The 10-year government bond is currently trading at 80 basis points above the policy repo rate. Given the policy repo rate is near cycle peak, this spread looks high compared to its historical average during peak rate environment.

In line with this view, we would use every rise in yield to extend the portfolio duration by accumulating long term bonds in a staggered manner, added Pathak.

Debt mutual fund investors have been waiting for the Reserve Bank of India to start cutting policy rates. However, the banking regulator has been holding rates in its policy reviews as it continues to be cautious about the inflationary pressure in the economy. The high interest rates and inflation scenario globally is also keeping RBI to adopt a wait and see approach.