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Short term debt funds good bet, say fund managers

Chirag Madia
Short term debt funds,  Reserve Bank of India,  short duration debt funds,  money market funds,  fixed income securities
Short term debt funds, Reserve Bank of India, short duration debt funds, money market funds, fixed income securities

Debt fund managers, following Friday's rate cut by the Reserve Bank of India, are of the opinion that investors should look at investing in short duration debt funds, given that there's ample liquidity in the system and market expects more rate cuts going forward.

The central bank on Friday changed the repo rate to 5.15% from 5.40% with immediate effect. Kumaresh Ramakrishanan, chief investment officer-fixed income at PGIM India Asset Management Private, said, "It's very clear if investors wants to invest in fixed income side, they should allocate money to short and medium term segment, which have a maturities of three years as they offer better rates than a lower tenure paper."

Market participants believe that currently a good quality three-year 'AAA'-rated paper is yielding close to 7.10-7.20%, which is higher than one year certificate of deposits (CD) which is yielding 6.15-6.20%. Short duration funds invests in debt and money market instruments where duration of portfolio is between one to three years. On the other hand, liquid funds, ultra short duration funds and money market funds have instruments maturity between 91 days to one year. In the past one year, short duration category and medium duration funds category have given returns of 5.82% and 5.97%, shows data from Value Research. While other category such as liquid funds and ultra short term funds have given returns of 6.90% and 7.18%, respectively, in the last one year.

The prices of fixed income securities are governed by interest rates prevailing in the markets. Interest rates and price of fixed income securities are inversely proportional. When interest rates decline, the prices of fixed income securities increase. Similarly, when there is hike in interest rates, the prices of fixed income securities come down.
On Friday, 10 year benchmark government securities (G-Sec) closed at 6.68%. Market participants are expecting one more rate cut in this financial year, new 10-year G-Sec yields might go to 6.75% by end of this financial year.

Devang Shah, deputy head-fixed income at Axis AMC, said, "RBI is very positive on liquidity front and they want transmission of rates to happen, which has not happened yet. Rate cuts have been delivered, and for transmission to happen, they need to keep banking liquidity quite positive and get the deposits rates lower. All these factors make short-term and ultra short-term and low duration funds space very attractive."