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Long duration bond mutual funds are offering highest returns in one year. Is it time to invest?

For a long time, mutual fund managers cautioned the investors against investing in these schemes.

, ET Online|
Updated: Jul 10, 2019, 12.57 PM IST
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Long duration bond funds are topping the return chart in one year. These schemes, which were hit badly by the RBI’s change in stance and liquidity crunch in the market, seem to be getting their mojo back. The long duration bond funds category is offering 20.03 per cent returns in one year, 9.81 per cent in three months, and 4.15 per cent in one month. Is it time for mutual fund investors to start betting on them?

For a long time, mutual fund managers cautioned the investors against these schemes. They believed that there was a lot of uncertainty in the market and that could impact these schemes adversely. However, things have changed in the last six months. “Most of the worries for the debt market have overturned in the last few months. Fed changed the outlook to dovish surprisingly, inflation came down and oil prices came down from 80 to now around 60 USD/ barrel. All of this has overturned the fortunes of the long duration debt schemes,” says Mahendra Jajoo, Head - Fixed Income - Mirae Asset Mutual Fund.

Mutual fund managers believe that there is still room for more rate cuts. Many of them are expecting RBI to cut rates again in the upcoming MPC meet on June 6. This might add to the rally in the long duration bond funds and other long term debt funds like gilt funds. “Crude oil prices have fallen by 12 USD/barrel in the last one month. 10-year benchmark yield is below 7 per cent. There is a room for a 50 bps rate cut in the system. We are expecting the repo rate to fall below 6 per cent,” says Arvind Chari, Head- Fixed Income, Quantum Advisors.

However, these fund managers also believe that we are half way through the rally that is happening in the long duration bond funds. They believe that the positive sentiment because of the OMOs and rate cuts has already been factored in by the market. “Investors can invest in these schemes with a medium term horizon of three years at least. We believe that these schemes will continue to offer double-digit returns for a year. However, investors should be ready to face volatility in these schemes,” says Mahendra Jajoo.

Fund managers suggest that investors who don’t want volatility in their investments should stay away from these schemes. “The schemes have seen a rally and they might give good returns if the government surprises with OMOs and the repo rate continues to stay below 6, which is unlikely for a long time. We are expecting the segment to remain volatile and we don’t advise retail debt investors to get into volatile schemes,” says Arvind Chari.

Fund managers say evolved investors, who can tackle volatility and want to cash in on the opportunity, can consider investing in long term debt schemes. However, if you are a risk-averse debt investor, you should stick to short duration funds or bet on dynamic bond funds, they add.
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