SHORT-TERM FUNDS MAY BE YOUR BEST BET, NOW

Yields on bonds being on an upward curve, many investors are reworking their investment strategy in debt funds, write Nikhil Walavalkar & Prashant Mahesh
With yields on 10-year government bonds crossing the 8%-mark recently, investors are going in for a tactical shift in their fixed income portfolio. As against liquid plus and funds with tenure of less than a year, they are now choosing to park funds for the next couple of months in short-term funds. Many are betting that yields will spike temporarily to the 8.25-8.35% range, which they feel is an ideal time to invest in gilt funds. Investing in gilt funds — if there is such a spike — provides an opportunity to earn a return of 10% per annum from gilt funds over a 2-year period, experts feel.
“An yield of 8.35-8.5% on a 10-year benchmark bond is a good entry point for aggressive fixed income investors to enter long-term gilt funds with a 2-year timeframe,” says Devendra Nevgi, founder & principal partner of Delta Global Partner.
Some indicators do point out that interest rates could speak out in the near term. One reason is for rates peaking is that the market might turn out to be over-pessimistic. “There is skepticism in the market whether the government would be able to remain within set targets. Our view is that the government can actually do better,” says AV Srikanth, executive director, Anand Rathi, Private Wealth. He expects yields to fall by 100 basis points over the next 1-year and hence, expects investors to earn a return of 10% per annum from gilt funds over a 2-year period.
Second, as growth picks up in 2011 and further picks up speed in 2012 and 2013, the fiscal deficit is expected to come down sharply. Additionally, India is expected to be current account surplus from 2013 onwards. Both of these will be further bring G-Sec yields down as they will reduce the government borrowing programme sharply. Though investors are looking at medium-to-long term income funds with a view to earning higher returns than gilt funds, the underlying credit risk in such funds cannot be ruled out. In gilt funds, investors get the opportunity to play the interest rate cycle without exposing themselves to credit risk.
The other factor that has been driving up interest rates is inflation which is likely to hit the double digit mark soon. As non-food inflation is expected to rise in the short term due to hike in fuel prices and partial withdrawal of stimulus, there is a possibility of an uptick in the rates in the immediate future.
But with supply side issues being well addressed, inflation is expected to go down over the next 6-9 months, with the arrival of rabi crops and a good monsoon. This could bring down interest rates and push up bond prices. “Though inflation may touch double digits in the first quarter of the next year, by year end it should come down to 6-7%,” says Pankaj Jain, fund manager- fixed income, Taurus Mutual Fund.
Investors in fixed income or debt securities or debt funds benefit when the interest rates come down and vice-versa. As the rates come down, the value of securities moves higher, taking the NAVs higher. “We advise investors to move from liquid plus funds to short-term income funds, with maturity of 1-2 years, and may review strategy once the 10-year point crosses the 8.35% mark,” asserts Ranjit Dani, a financial planner.
Courtesy:- ET dt:- 19-03-2010
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