Investment strategy for debt investors as inflation fears rise

NEW DELHI: Given the expectation of an interest rate hike and subsequent normalization of Reserve Bank of India (RBI) policy, experts suggest investors should focus on funds at shorter maturities that have less impact when yields increase.

May consumer price index (CPI) inflation jumped to 6.3% year-on-year. Headline inflation is now expected to average around 6% in FY22, compared to earlier forecasts of around 5.1%.

“It changed the market’s expectations for the timing of policy standardization. With the acceleration of inflation dynamics, the RBI may begin to normalize its policy sooner rather than later. It can first withdraw the excess cash and then move on to rate hikes, ”said Pankaj Pathak, fixed income fund manager, Quantum Asset Management Company Pvt. Ltd.

Reacting to rising inflation, bond yields rose 10 to 20 basis points across the curve, with the exception of the 10-year benchmark bond which rose four basis points. The 10-year benchmark G-Sec was trading up 1.3% to 6.17% on Tuesday.

According to the fund house, RBI’s tactical interventions and bond purchases under the Government Securities Acquisition Program (GSAP) will continue to support the bond market in the near term. “However, the macroeconomic environment has become unfavorable for the bond market,” he said.

The AMC believes that inflation and the normalization of monetary policy will play a greater role in shaping the path of interest rates over the medium term.

“We also argue that bond yields have already bottomed this cycle and are likely to rise over the next two to three years, given the expectation of an interest rate hike it would be prudent for investors to focus on shorter-dated funds which impact less when yields rise, ”Pathak said.

Investors should note that bond prices and the net asset value (NAV) of debt funds fall when market returns rise.

The fund house also suggests that cautious investors should stick to very short-dated debt categories such as liquid funds, and investors with a longer holding period and an appetite to tolerate intermittent volatility might consider reductions. dynamic bond funds.

“We also suggest that investors lower their expectations of debt fund returns, as the potential for capital gains will be limited in the future,” the fund company said in a note.

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Carol M. Barragan

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