Long term bond funds gain currency after RBI policy
If RBI cuts rates in the future, long-term bond funds should regain the lost spark once again. Should you bet on them?
Lakshmi Iyer, head - fixed income and products, Kotak AMC, says that she is maintaining her stance that investors in long-term bond funds should stay invested. “I strongly disapprove the strategy of exiting a fund because of volatility due to policy changes,” says Iyer. “Yes, new investors can get into long-term funds. The yield trajectory seems to be headed lower. I think tail-end allocation to duration fund should continue. New investors can get into long duration funds if there is a small consolidation.”
Amit Tripathi, CIO – fixed income investments, Reliance Mutual Fund, also believes that there is a case for investing in long term bond funds, but adds that investors shouldn’t go for them only because of change in interest rate view or short-term volatility. “Given the view on rates, and the expectations of the 10-year benchmark moving towards the 6.00-6.25 per cent range in the foreseeable future, there is a case for investing in long duration funds,” says Tripathi.
Long term bond funds suffered significant losses after the RBI changed its stance on policy rates in February. Though they have recouped some of the losses, some investors are still sitting on losses. In fact, many mutual fund advisors were asking investors to review their long-term bond fund investments and move to shorter duration funds. However, after RBI revised its inflation projection downwards yesterday, even many of these advisors are suddenly bullish on long-term bond funds on hopes of a rate cut in the coming months.
While Lakshmi Iyer believes that the rate cuts will be data driven, other experts are expecting a series of rate cuts in the coming year. “Based on our overall macro assessment and the revised inflation forecasts of the RBI, we expect 50-75 basis points repo rate cuts in FY 2018,” says Amit Tripathi.
However, experts believe that getting into long-term bond funds and getting out of them on hopes of rate cuts or absence of them is a wrong investment approach. “Simply investing in these funds on a immediate view of a rate cut will always be suboptimal because there will be timing issues in terms of capturing the entire market movement, and exit issues as well,” says Amit Tripathi.
Finally, do not change your investment strategy after every policy review or change in economic scenario. Always pick a debt scheme that matches your investment horizon and stay invested till you achieve your goal, irrespective of the market conditions.