Repo rate hike: Fixed income funds set to become attractive again


It is time investors look at fixed income as an asset class, as yields are on an upward trajectory following the surprise hike in policy rates by the Reserve Bank of India. Given the volatility in the equity markets, fixed income experts say investors should start nibbling on fixed income securities across the spectrum. Ahead of the actual hike in rates, investors were being advised to stick to the short-term debt funds, but with Wednesday’s hike the cycle has officially turned. Even though real interest rates are not likely to become positive in a hurry, fund managers believe fixed income securities will become more attractive again. 

On Wednesday, yields on government securities moved up more than 25 basis points, whereas short-term debt instruments yields rose 20-30 basis points. Investors could consider allocating funds to fixed-income schemes of mutual funds, especially ones at the shorter-end of the curve amid better accruals and decent yields. Sahil Kapoor, market strategist and head – products, DSP Mutual Fund, said: “Following today’s rate hike, it is a good time for investors to start looking at fixed income, given that everything else is so volatile. We have been aligned to the short end of the curve, given that we were expecting this to play out at some point. Since the rate hike cycle is still on, it is best to stick to short-term funds.”

Fund managers also believe that due to an appreciable rise in the yields, the middle of the yield curve also remains attractive for investors, whereas the longer end will continue to see higher uncertainty going forward. Says Pankaj Pathak, fund manager –  fixed income, Quantum Mutual Fund, “I think there is opportunity somewhere at the middle of the bond yield curve around five-, six-year bonds, where yields have already moved up a lot and much of the potential rate hikes are already priced. However, there is a very high uncertainty and there will be surprise elements in between, and one needs to have flexibility to change that allocation. At the longer-end bonds, there is still very high uncertainty.”

After the RBI’s announcement and even hawkish signals from the US Federal Reserve, experts believe that the 10-year benchmark bond yield could jump up to 8-8.5% in upcoming days. “It is likely to be a tough market for all asset markets. Indian bonds could trade later in the range of 8-8.50%,” said Sandeep Bagla, CEO, Trust Mutual Fund.