RBI Policy: Invest in short-term debt mutual funds
The Reserve Bank of India (RBI) has surprised the money market by maintaining status quo on key rates in its policy review. Most bankers were expecting a rate cut of 25-50 basis points (100 basis points = 1 per cent). Against this backdrop, what should be your debt mutual fund investment strategy?
“Investors should focus more on accrual funds, short-term income funds or any kind of funds with an average maturity of three to four years,” says Sudhir Agrawal, Executive Vice President-cum-Fund Manager, UTI Mutual Fund.
Experts like Agrawal are suggesting investors to bet on short-term debt schemes because they are less volatile than long-term debt schemes. A status-quo policy doesn’t offer any clear cues on future interest rate movements and it may keep the market on the edge, as market participants may be desperately looking for firm cues.
For late comers, a rate cut is always a happy news for debt mutual fund investors. When the rates come down, bond prices go up. This would prop up the Net Asset Value (NAV) of debt mutual funds, especially long-term debt funds.
However, due to the uncertainties (US rate hike, demonetisation, etc) surrounding the money market, the RBI is postponing its decision on rate cuts. That is why not many people are ready to bet on long-term debt bonds at the moment.
Don’t act in haste
A rate cut or hike or status quo alone shouldn’t be the reason for investing or selling debt mutual funds. You should always pick up an investment option depending on your goal, investment horizon and risk profile. Experts typically ask investors to opt for debt mutual funds for their short-term goals.
“I don’t think mutual fund investors should act on short-term volatility. But yes, if he is heavily invested with long term funds, it is probably time for him to shift a part of his investment to short term funds,” says Agrawal.
If you have been thinking of making some investment in debt mutual funds, you can still go ahead with your investments. However, you should remember that you may not immediately benefit from a rate cut.
“The way these bond yields are moving up, investors can expect some handsome returns in the next one year or so. They will earn much better than fixed deposits,” says Kartik Jhaveri, Director, Transcend Consulting.
Jhaveri says that the investment decision should be entirely based on the requirement of the investor. For example, if somebody is investing for four to five years, a medium term fund or a dynamic bond fund with a mix of corporate bonds and government securities should be a great idea, he says.
