“Investors could allocate to liquid/cash categories more for their short-term needs and gradually add to target maturity funds over the next 3-6 months to help secure higher rates,” said Nirav Karkera, head of research at the brokerage Fisdom. “Those with a risk appetite could add funds for credit risk.”
Fund managers expect the benchmark 10-year government bond to rise another 25 to 50 basis points after hitting 7% last week. “The RBI is expected to raise the repo rate by 50 basis points this financial year,” said Akhil Mittal, Senior Fund Manager (Fixed Income), Tata Mutual Fund. As short-term rates tighten, cash could generate better returns.
“With the removal of excess cash and rising short-term interest rates, cash returns should improve going forward,” said Pankaj Pathak, fund manager, Quantum Mutual Fund.
Liquid funds – considered one of the safest categories of debt – invest in securities with maturities of less than three months. Debt plans that invest in short-term securities are best positioned to take advantage of rising bond yields.
For long-term debt schemes, such as gilt funds, which bet on government securities, and income funds, a rise in interest rates leads to market price losses, as these products trade bonds to generate yields. A scenario of rising interest rates is not suitable for investing in long-term funds. This is because when bond yields rise, bond prices fall and vice versa. These funds need prices to rise to make trading profits.
Cash yields could rise from the current 3-3.3% to 4-4.5%. Investors could also gradually allocate target maturity funds over the next six months. Currently, investors could earn around 6.4-6.6% on this paper maturing in 2026 or 2027.
This category has a defined maturity and invests passively in bonds of similar maturity constituting the fund’s benchmark index giving visibility on returns. The risk of loss is lower if the investments are held to maturity. Since there is no lock for these funds, the liquidity is higher.
Some fund managers believe that investors looking to earn 7-8% over a three-year period could allocate around 10% of their portfolio to credit risk funds, which bet on lower-rated corporate debt securities. .
“Credits remain an attractive game for investors with a 3-5 year investment horizon as the improving economic cycle and supportive liquidity ease credit risk concerns, particularly for credit names. superior quality,” said Devang Shah, Co-Head of Fixed Income, Axis Mutual Fund. .