Short-term funds better bet, but you can risk a bit on long play

MUMBAI: Debt investors have started closely following the bond market. The government and the Reserve Bank of India’s efforts to prop up the rupee has made the bond market extremely volatile. According to Value Research, an independent mutual fund tracking firm, short-term debt fund category is down 0.25% and income funds category is down 1.52% during the same period.

“The central bank’s primary aim is to stabilise a falling rupee, and the tightening measures are likely to continue for some time. This means interest rates in the near term may remain high. Investors should invest in shortterm bond funds,” says Ashish Shankar, head of investment advisory at Motilal Oswal Wealth Managers. Short-term funds generally have a portfolio consisting of certificate of deposits, commercial paper and bonds with less than one year-to-maturity. As the investments are short term in nature, the portfolio does not carry high interest rate risk. Fund managers also invest in highlyrated securities.

Experts believe the poor performance of some debt funds may continue as there is no clarity on rupee yet. The rupee fell to an all-time low of 62.03 against the dollar on Friday. In such a scenario, tightening by the RBI is likely to continue, which will keep interest rates high. Among the steps announced last week, the RBI reduced the limit for remittances made by resident individuals from $200,000 to $75,000 per financial year, disallowed use of liberalised remittance scheme to buy property outside India and reduced limit for overseas direct investment (ODI) under automatic route for all fresh ODI transactions. These measures, along with the tightening measures taken in July, led to a sharp rise in short-term rates. Shortterm funds offer a yield-to-maturity (YTM) of anywhere between 10.25% and 10.50%%, giving investors a good entry point.

While your portfolio should be tilted in favour of short-term funds, some experts feel this is an opportunity for high-risk takers to earn extra returns by investing a small portion in long-term income funds. These funds, though down, may offer a good investment opportunity, as bond yields could head lower. “The 10-year G-Sec is close to a peak. Over a three-to-six month period, it should come down to 8.5%,” says Ashish Shankar. As volatility in the forex markets settles down, the RBI would focus on growth. If this happens, investors could see bond prices move up and get capital appreciation, says Dwijendra Srivastava, head — fixed income, Sundaram Mutual Fund.