Fund managers believe this strategy gives investors the chance to earn a high carry and capital appreciation on their long-duration bonds as and when the RBI cuts rates later next year.
Debt funds that invest in medium and long-term bonds include categories like corporate bond funds, banking and PSU debt funds, long-term funds and gilt funds.
In the latest monetary policy, RBI kept the repo rate unchanged at 6.50%. after having raised the repo rate by 250 basis points since May 2022.
“Given the fact that India’s growth is pretty robust with inflation also under control, RBI is likely to be on long pause,” said Puneet Pal, head-fixed income at PGIM India Mutual Fund.
Fund managers believe the Indian economy is on a strong growth path, with the central bank raising the GDP growth forecast for the year from 6.5% to 7% and are confident of robust growth. India is well placed in the global context with high forex reserves, and with crude prices softening and import bills coming down, it has strengthened the country’s external conditions.However, Pal believes that rate cuts in India will start only after the easing cycle has begun in the advanced economies, which he expects from the second or third quarter of 2024. “Bond yields tend to react in advance of the start of a rate-cutting cycle and thus we believe it is the right time for investors to start increasing their allocation to fixed income, especially at the longer end of the curve,” added Pal.
Fund managers believe investors should not put their entire money in one go, but stagger their investments to take advantage of any interim volatility.
“With corporate bonds yielding 7.75% returns are lucrative and can beat inflation. Investors should stagger their investments over the next 2-3 months,” said Sandeep Bagla, CEO of Trust Mutual Fund.
Fund managers believe at the current levels, returns from fixed income across the yield curve are high and attractive and offer real returns to investors.
“Investors may look at the 2 to 5 years segment as their core allocation as it provides an opportunity to capture prevailing high yields while getting less impacted by the volatility at the longer end,” said Vikas Garg, head-fixed Income at Invesco Mutual Fund.
As part of their strategic allocation financial planners suggest a mix of short-term as well as long-duration funds.
“Investors should put in two-thirds of their portfolio into short-term funds and one-third to long-duration funds,” said Vishal Dhawan, founder of Plan Ahead Wealth Advisors.
The short-term portfolio will help them earn an attractive coupon with low volatility and the long-duration funds, will help them earn a capital appreciation as and when rate cuts happen.
