The Reserve Bank of India (RBI) in the last week changed its stance, prioritising inflation over growth. Despite the RBI’s pivot, there is no clarity on when the first rate hike will come. As a result, investors in debt schemes of mutual funds are likely to avoid long-duration bond funds in the near term. Short-term debt funds, typically with a duration of up to three months, are likely to witness higher inflows as short-term rates have started moving up.
The ultra short- and short-term funds are considered as low risk funds in rising rate scenario, while long-duration funds remain more sensitive to interest rate changes. Sanjay Pawar, fund manager – fixed income, LIC Mutual Fund, said, “In the current environment with huge borrowing in pipeline, a shift in stance from accommodative to neutral by RBI may result in higher terminal rates. Higher the duration greater will be the impact. So, in a rising interest rate scenario accompanied with higher weekly sovereign supply majorly on long end, lower duration schemes may be at lower risk compared to a scheme with higher duration.”
The benchmark 10-year bond yield surged above 7.1% in the last week after the Reserve Bank of India (RBI) revised its inflation forecasts and shifted its focus to tackle inflation.
According to experts, going forward, specifically, inflows will be seen in liquid, ultra-short and short categories, while the banking/PSU funds, corporate bond funds, and gilts will see outflows at least in the near term. “Tactical investors will move to short-duration funds in the coming months and inflows are likely to be seen in liquid, ultra short and short duration categories, while long-term funds like banking/PSU funds, corporate funds, and gilts are likely to see outflows,” Mahendra Jajoo, CIO, fixed income, Mirae Asset Management, told FE.
However, if there’s further clarity on the rate hikes in the upcoming policies by the RBI, the long-duration bond funds might see some interest from investors after three-six months, experts added.