Debt mutual funds are set to buy more long-duration bonds for the first time in the past 18 months after the Reserve Bank of India Friday raised the benchmark rate by 50 basis points.
Top fund houses ET spoke with said banks would now find it attractive to buy into debt, which could outpace equities in rewarding investors now.
Mutual funds bought a net of ₹2,892 crore of government debt on Friday versus ₹108 crore a day earlier, showed Clearing Corporation of India data.
“After a long hiatus, we are looking to add duration to our debt portfolios,” said A Balasubramanian, CEO, Aditya Birla Sunlife Mutual Fund. “We plan to extend multiple tenors by at least 6-12 months via target maturity or dynamic debt funds after the last rate hike.
“In absence of any blockbuster equity and real estate markets, fixed income funds will likely yield much higher than bank fixed deposits as we plan to invest more in longer maturity papers,” he said.
Middle- to long-term debt funds are likely to yield 6.5-7% in the next two-three years compared with 2.28% returned in the last one year and 4.81% in three years amid record high equity market gains, show data from ValueResearch.
“We will now look to adopt a more positive outlook with respect to higher duration gradually in our debt portfolios after the RBI’s latest sharp rate hike and post policy briefings,” said Rajeev Radhakrishnan, chief investment officer – fixed income at
“The policy last week demonstrated a more resolute approach to curb inflation and anchor inflation expectations closer to the policy target of 4%,” he said.
The benchmark bond yield surged as much as 18 basis points Friday itself after the RBI’s policy announcement. The gauge closed at 7.29%, up 13 basis points. A near term peak is seen at 7.50%.
Shorter duration sovereign securities of particularly up to one-year maturities, however, fell about 4-5 basis points.
“Fund managers were beginning to raise duration as long-term papers were beginning to look attractive given the terminal rate expectations,” said Mahendra Jajoo, CIO – debt at Mirae Asset Management. “However, they may now be a bit more circumspect amid evolving situations and may only gradually increase duration of investment.”
The repo at which banks borrow short-term funds is now at 5.40%. Between May 4 and August 5, the central bank raised the benchmark gauge by 140 basis points. The terminal rate or peak of the ongoing rate hike cycle is expected in the range of 6-6.50%.