Friday, April 13, 2018

Invest in Dynamic Bond Funds after RBI Rate cut

 
Even though the Reserve Bank of India (RBI) has cut repo rate in its third bi-monthly monetary policy review, mutual fund managers are unsure about the future rate cuts. They believe that inflation may inch up and there is some uncertainty about future rate cuts.

RBI has not changed its monetary stance. They have taken note of the inflation. Further correction in rates depends on the data

The banking regulator cut repo rate by 25 basis points (100 basis points = 1 per cent) to 6 per cent. This is the first rate cut after the banking regulator changed its monetary stance from accommodative to neutral in February.

There is a possibility that inflation may go up from here. So, recommending long-term bond funds will not be a good idea at this time. Debt investors should stick to dynamic bond funds in such uncertain time

Dynamic bond funds are typically recommended to debt mutual fund investors who want to leave the job of taking a call on interest rates to the fund managers. Dynamic bond funds invest across instruments of various maturities, based on the view of the fund manager. The fund manager has the freedom to decide on his investments as per his view on various factors in the economy.

Long-term debt funds are extremely sensitive to interest rate changes in the economy. These funds benefit the most when there is a fall in rates and they suffer the most when the rates go up.   

Investors should remain invested in medium-to-long-term bond funds while short-term funds should still make your core portfolio. Medium-term funds will eliminate the volatility, while long-term funds will give you extra returns. Both are an important part of your portfolio. Also, short-term funds are always a good idea,

There are a lot of good accrual strategies in the shorter-term but investors should not ignore long-term funds. If you have an investment horizon of three years and more, you should definitely go for long-duration funds. This decision has nothing to do with the rate cuts. If you want to invest for less than two years, short-term funds will give you decent returns





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