Invest in debt, say fund managers as rate cut hopes rise

Debt funds are reaping the benefit of a rally in bond prices after the government’s demonetisation announcement.

In particular, income funds, dynamic bond funds and gilt funds have offered impressive returns over the past week. The one-week return for the gilt (medium to long-term category) is two per cent, while it is 1.26 per cent and 1.63 per cent in the case of income and dynamic bond funds, respectively.

And, fund managers are advising further investments in debt-oriented schemes, on an optimism regarding interest rate cuts. They expect the Reserve Bank of India (RBI) to cut its policy rate in December, as against earlier expectations of rate cuts in February.

 
S Naren, chief investment officer at ICICI Prudential Mutual Fund, says: “The bold move by the government to has improved the chances of an interest rate cut to earlier than expected. The demonetisation step will lead to a lot of money coming back into the banking system. There is a possibility of much lower yields in the medium term. Hence, this event has given further strength to our bull call on duration for the next six to 12 months. We recommend investing in fixed income immediately, as returns are expected to be front-ended.”

 
From a one-year perspective, debt funds could give a return between eight per cent and 15 per cent, say fund managers.

At a time when a majority of equity MFs, across the category, are struggling with mid-single digit returns in the past year and negative returns for the past three months, debt funds have dominated in performance.

 
Further, with cuts in bank deposit rates with an annual yield of merely seven per cent, there are possibilities of a push-up in debt fund inflow.

 
Murthy Nagarajan, head of fixed income at Quantum MF, says: “The debt market has been pleasantly surprised by the abolishing of Rs 500 and Rs 1,000 notes. This is a long-term positive for the debt market and might lead to a repo rate cut (by RBI) of 50 basis points. Local factors will continue to be a dominating force in the Indian bond markets.

As on October, overall debt assets under management were Rs 10.5 lakh crore. Of this, income funds led with 
Rs 7.5 lakh crore, money market funds with Rs 2.7 lakh crore and gilt Funds had about Rs 17,000 crore. 

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