With a change in macro-economic scenario, fund managers tend to tweak their investing outlook to align with the new market realities. Soon after the banking regulator raised repo rate to bring it to pre-pandemic level, some fund managers have started to make a higher allocation to short-term funds.
There is no doubt that short-term bonds are striking a chord with fund managers and other large investors as there are heightened chances of the central bank pausing the interest rate hikes in the near future. Quantum Asset Management and Tata Asset Management are buying debt with maturities of up to five years, a Bloomberg report stated recently.
The Reserve Bank of India (RBI) is likely to complete the rate hike cycle this financial year after raising the repo rate by 35 basis points, thus raising cumulatively by 225 basis points in this fiscal year alone.
Currently, the repo rate stands at 6.25 percent, the highest since August 2018.
Investing in short term bonds
Experts believe that the long duration bonds will face higher volatility, so it is safer to invest in short term bonds. And significantly, the yield differential between bonds across tenors is also shrinking.
“Short term bonds will be ideal this time because it is at least one year before the rate reversal happens. One can go for one year maturity for investment in bonds. As of now, the difference in yields for 5-year G-Secs and 10-year G-Sec is 10 basis points. So, it doesn’t make sense to lock-in for 10 years for mere one-tenth of a percentage point,” says Sridharan Sundaram, Founder of Wealth Ladder Direct.
As far as long duration bonds are concerned, one can take a call later when the rate hike cycle changes but not at this stage, he adds.
The above-mentioned Bloomberg report also states that some AMCs find longer dated securities less appealing because the government may raise borrowings next year to finance its spending in the run up to 2024 general elections.
What about target maturity funds?
However, there are some who opine that target maturity funds are expected to outperform short term funds in the current macro-economic scenario.
“If you are looking for guaranteed returns and do not want to run the credit risk then you can go for target maturity funds which invest in the govt (state and Centre) bonds and PSU securities. The other alternative is ultra-short term debt funds but the only con in these funds is that some fund managers tend to invest in corporate bonds in order to earn a higher return,” says Basavaraj Tonagatti, a Sebi-registered investment advisor and founder of Basu Nivesh.
He further adds that investors should be mindful of the fact that they are looking at debt securities primarily to meet short term financial goals and for diversification of their portfolio.
