Should you invest in debt funds as interest rate cut inches closer? | Simply Save
Debt mutual funds: The US Fed has indicated that interest rate cut might happen as early in September, which might prompt RBI to follow suit. This bodes well for debt funds, says Siddharth Chaudhary- Senior Fund Manager-Fixed income at Bajaj Finserv Mutual Fund on Moneycontrol’s Simply Save podcast.
To listen to the podcast, click above. To read the podcast conversation, scroll down.
The US Federal Reserve has indicated that interest rates in the US might start to fall starting September 2024. Following suit, The Reserve Bank of India could begin rate action earliest by December 24 as there will be more clarity on any underlying information.
These are among the few key indicators that debt markets and fixed-income mutual fund managers are watching closely. Amidst global monetary easing, Indian bonds continue to be appealing, supported by robust and stable macroeconomic fundamentals and favourable demand-supply dynamics.
In another development, Indian bond markets remained stable and rangebound in the absence of any major triggers even as the new Unified Pension Scheme. UPS was announced last month, which can have a potential negative impact on both the central and the state’s fiscal deficit.
Bond yields usually often move in anticipation of rate changes.
Therefore, investors might consider increasing their allocation to fixed income with each rise in yields. Experts anticipate that long-term bond yields will gradually decline over the next couple of quarters.
Moneycontrol spoke with Siddharth Chaudhary- Senior Fund Manager-Fixed income at Bajaj Finserv Mutual Fund on the strategy to benefit from the rate-cutting cycle, debt fund categories that look ideal at this point and how to create a robust fixed-income portfolio.
Here’s a highlight of what Chaudhary said:
• Domestic policy rates have peaked, leading to a favourable demand-supply dynamics and a downward shift in the yield curve by around 30-35 basis points across maturities.
• Despite global growth slowdown, India’s growth remains resilient, allowing the Monetary Policy Committee to maintain the status quo.
• The demand-supply equation is favourable for bond prices, with a minimal spread between repo rates and the 10-year G-sec yield.
• Expect a 25 basis point rate cut from the Fed in September, with a clear direction for rate cuts if data continues to indicate strong growth.
• Inflation in the US is near 2 percent, and India’s inflation remains well-controlled, making a rate cut unnecessary here.
• The potential for future rate cuts depends on global developments and the INR-USD exchange rate.
• The Reserve Bank of India is more concerned with food inflation and potential growth rate shifts due to regulatory changes.
• A shallow rate cut cycle is expected in India, with around 50 basis points of rate cuts if growth slows down.
• Invest in long-term funds for retirement plans and medium-term funds for specific targets like buying a car or a home.
• Short-term funds and corporate bonds are also good options, with a focus on credit risk and asset allocation.
• The overall situation remains bond-positive, with a clear expectation of rate cuts and a favourable demand-supply situation.
• Fixed income funds should still find a part in strategic asset allocation, despite the taxation changes.
• The current environment offers a tactical allocation opportunity for those looking to take profits from other asset classes.
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