Fixed income investing: Stick to ultra short-term funds

Investors looking to put money in fixed income schemes could opt for debt funds that invest in short-term papers. After the rate cut on Monday, the RBI has cut a total of 150 basis points since the beginning of 2015 when rate easing began and fund managers say further aggressive rate cuts are unlikely.

“Gilt and dynamic bond funds have already seen as much as 3-4% appreciation beginning 2016. This was a result of long-term rates (10-year gilt) falling from 7.76% in end December 2015 to 7.43% over the past 3 months,” says Vidya Bala, head of research at Fundsindia.com.

Fund managers believe that at best, there could be one more rate cut of 25 bps.

“Since we are close to the end of the rate cut cycle, investors could start switching from long duration gilt funds to ultra short-term funds,” says Dwijendra Srivastava, CIO (debt), Sundaram Mutual Fund. He believes that since in India, the need for capital is huge, there could even be a reversal or tightening of rates post one more cut.

“Short-term debt funds, holding short-to-medium bonds, will still stand to gain from the rate ease as the bonds they hold may see a price appreciation,” adds Vidya Bala.