SHORT-TERM debt mutual fund schemes have better return prospects for investors in comparison to long-term gilt and income funds after the 25 basis points rate hikes by the Reserve Bank of India (RBI) and possibility of further one or two rate hikes in near future, fund managers said.
RBI's hawkish statement in the monetary policy review shows inflation control is its prime concern and they are ready to sacrifice growth which means investments in short-term debt funds will yield positive returns while investors should avoid fresh investments in long-term funds, those already invested in long-term fund can remain invested, fund managers told Financial Chronicle.
Investors should look at short-term papers since their average maturity is less, and this enables them to take advantage of the rising interest rate scenario.
Investors should stay away from income and gilt funds and it is better to look at short-term floating rate, ultra short-term fund and fixed maturity plans (FMPs), I am not seeing any pause in interest rate hike in next two to three months, fresh investments should be in short term papers and not in long term papers.
With the tenth rate hike since the start of 2010, there has been an effective increase of 425 basis points from a low of 3.25 per cent reverse repo rate to the current repo rate of 7.50 per cent. Rising interest rate has led to higher number of FMPs hitting the market in 2010 and 2011 so far.
FMPs invest in short term papers and they are held to maturity, resulting in negligible interest rate risk. Inflows in FMPs have been good off late with consistent rate hikes. This year so far more than 311 FMPs have been floated and there were close to 340 FMPs floated in 2010 as against just 90 FMPs in 2009.
It may not Impact on debt funds as 25 basis point hike in the interest rate was already factored in the debt instruments. Re turns from gilt funds over the last one week have been negative in the range of 0.2-0.4 per cent. Short-term funds have outperformed and most investors are playing on short-term yield curve.
With oil price increase and diesel price hike pending, inflation will go up again, he said. Interest rate depends on how inflation behaves. Most mutual fund players will play on lower end of maturity curve Returns in long term papers will remain volatile with high inflation figures expected for another two to three months.
RBI's tone is quite hawkish about inflation control. Inflation is central bank's prime concern, market is pricing in one more 25 bps hike though the opinion is divided on one or two hike of 25 bps.
The RBI has chosen inflation control as its main focus at this point of time and will most probably con and will most pro batinue on the rate tightening mode until clear signs of inflation control are in sight. While domestic factors for inflation seems beyond control, international factors driving commodity price seem to be suddenly in India's favour, and this will lead to a pause in rate hike.
Going forward, global markets will have bearing on RBI's stance. For example, international oil price came down significantly on Wednesday leading to 15 basis point fall in US government securities yield. Fall in international commodity price will be positive and help RBI pause on rate hike.
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