Medium-duration debt funds and longer-duration target maturity funds may gain traction among investors as the current rate hike cycle is widely expected to be close to peaking.
The RBI raised the repo rate by 35 basis points on Wednesday to rein in inflation. It also lowered its growth forecast to 6.8% from 7% for the current financial year amid concerns over the global economic outlook, and retained its retail inflation forecast at 6.7%.
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According to Edelweiss MF, investors seeking long-term fixed income allocation should use this opportunity to increase allocation to target maturity funds maturing in 5-10 years to benefit from current elevated levels of yields and potential price appreciation in future in case of softening of yields. These funds track an underlying bond index and have a defined maturity period.
“Given the persistently high inflation, further rate hikes may be warranted. This may be a slight negative for the market which was anticipating a more dovish tone from the governor. We continue to recommend an allocation to short- to medium-duration instruments and target maturity funds wherein investors can lock in the prevailing yields in the markets,” said Vishal Chandiramani, managing partner – products, and COO, TrustPlutus Wealth.
Experts believe that the rate hike cycle could last till March, with inflation and the US Fed action being the wild cards. The market is pricing in a terminal repo rate of 6.5%.
“The current yield curve presents material opportunities for investors in the short to medium term space,” a note put out by Axis Mutual Fund said. For investors with a medium-term investment horizon of three year or more, incremental allocations to duration may offer significant risk-reward opportunities, the fund house said. For investors with a short-term investment horizon of between six months and two years, money market strategies continue to remain attractive offering competitive and low volatility.
