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Invest in short-term debt mutual funds, say debt fund managers after RBI policy

It is status-quo for your debt mutual fund investments, with Reserve Bank of India (RBI) keeping its policy rates unchanged in its policy review today.

, ET Online|
Feb 07, 2018, 03.00 PM IST
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It is status-quo for your debt mutual fund investments, with Reserve Bank of India (RBI) keeping its policy rates unchanged in its policy review today. Debt mutual fund managers are asking investors to stick to their investments in short-term funds and dynamic bond funds and consider reallocating a part of their investments in long-term debt funds to short-term funds.

“The decision of the MPC is consistent with the neutral stance of monetary policy in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth,” the RBI said in its sixth bi-monthly statement.

“Investors may invest in short-term debt and accrual funds. They may also look at Fixed Maturity Plans (FMPs),” says Lakshmi Iyer, Chief Investment Officer (debt), Kotak Mutual Fund. “Investors, who are invested in long duration funds, may rejig their portfolio and allocate a portion of their fixed investments into short-term debt funds,” she adds.

“We expected a very cautious tone in the policy document and not expecting a rate hike anytime soon. We had expected the policy document to refer to the slippage in fiscal numbers as stated in the budget announced on Feb 1,” says Kumaresh Ramakrishnan , CIO-Fixed Income, DHFL Pramerica Mutual Fund.

He also says that investors looking to invest in fixed income can go for short term debt funds as they will have low volatility. Investors who are willing to take a bit of risk may go for accrual funds.

“Investors who are completely risk-averse or wish to take the minimum risk possible may go for Fixed Maturity Plans (FMPs),” says Ramakrishnan.

FMPs are closed-ended funds where maturity is defined. These provide limited exit option to investors as they can only sell these on exchange. These products typically follow buy and hold till maturity strategy in their portfolio. An FMP may match the yield of securities in its underlying portfolio. There may not be big deviations.

Existing Investors in long term debt funds should revisit their portfolio and allocate a part of their corpus to short term debt funds. According to mutual fund experts, since a rate hike cannot be ruled in the coming months, investing in long-term debt funds doesn’t make sense anymore. A rising interest rate scenario is bad news for debt funds, especially long-term debt funds, because of the inverse relationship between yield and prices.

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