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RBI policy: Stick to short-term debt mutual funds, FMPs, say fund managers

The RBI raised repo rate by 0.25 per cent in its policy review.

, ET Online|
Updated: Aug 01, 2018, 03.55 PM IST
The Reserve Bank of India (RBI) might have surprised some money market participants with its policy rate hike today, but debt mutual fund managers continue to ask investors to stick to short-term debt schemes and fixed maturity plans (FMPS).

“It was not a surprise. Markets were anyway expecting a rate hike. The neutral stance with this hike is fairly okay. Markets will now worry about what is the liquidity stance. Because that’s where we haven’t got any colour, ,” says Lakshmi Iyer, Chief Investment Officer-Debt and Head of Products, Kotak Mutual Fund. "The rate hike was broadly expected because if this window was not there then for the next three-four months, they can’t do anything as the inflation is on its way down," she adds.

“The hike is in line with expectations. Neutral stance continues. No major surprises, markets will remain stable. Two to five-year Gsecs, one to three-year corporate bonds look attractive because of absolute yields and steep yield curve,” says Amit Tripathi, CIO – Fixed Income Investments, Reliance Mutual Fund.

The RBI raised repo rate, the benchmark lending rate, by 0.25 per cent in its policy review. The RBI hiked repo rate to 6.50 per cent, while retaining its neutral monetary stance. Though many money market participants have anticipated rate hike, a sizeable number of participants were expecting the banking regulator to hold its rates today.

“We were expecting a rate hike today. It was fairly on expected lines. I don’t think we are expecting a rally. The stance remains neutral. Probably at this stage, RBI is also looking for fresh data as it comes through over the next few quarters. We could have further hikes if the data is not positive. We think there is a room for one more rate hike in this financial year,” said Kumaresh Ramakrishnan, CIO-Fixed Income, DHFL Pramerica Mutual Fund.

A rate hike is considered bad news for debt mutual funds, especially long-term debt funds. When the interest rates or yields go up, the prices of bonds fall, which drags down the NAVs of debt mutual fund schemes. Yields and prices of bonds have an inverse relationship. In a rising interest rate scenario, short-term debt schemes are considered safer as they will be hit the least by rising rates.

“Yields are going to be range bound. We can see a small easing bias but that may not sustain as public sector banks continue to be net sellers. I don’t change my stance on debt funds. I would maintain that investors should be invested in a combination of credit-risk funds and short-term funds. If you want to lock-in for certainty, you should opt for fixed maturity plans,” says Lakshmi Iyer.

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