As the Reserve Bank of India has retained its neutral policy stance, investors should take a balanced approach for fixed income.
For short-term investments, look at money market and liquid funds. And for the long term, consider target maturity funds. If you cannot decide on the allocation yourself, go for dynamic bond funds.
Fund managers call it a barbell approach —allocating to short-term and long-term bonds while avoiding medium-term maturities. “A barbell strategy could be beneficial for investors as they can take advantage of the steepness in the curve which has currently happened in anticipation of foreign currency non-resident flows,” says Sandeep Yadav, head, Fixed Income, DSP Mutual Fund.
Dynamic bond funds
Dynamic bond funds offer a balance between risks and returns. Fund managers actively take a view on the future direction of interest rates and bond yields and invest across duration — short term, medium term and long term— depending on what their view is on the interest rates.
Investors can remain invested in these funds for a longer period without worrying about the interest rate cycles. In fact, over a longer time frame of 4-5 years, these funds can generate higher returns than other thematic debt funds.
Sneha Pandey, fund manager, Fixed Income, Quantum AMC, says a dynamic bond fund effectively does the barbell work inside the portfolio by dynamically moving between shorter and longer duration as conditions change, without requiring the investor to time two separate allocations and rebalance between them. “It is the same philosophy, minus the execution burden on the investor and is tax-efficient as well,” she says.
Money market funds
Money market funds can help in capital preservation and liquidity in the short term. These funds invest in high-quality, short-duration instruments like treasury bills, commercial papers, and certificates of deposit. These funds offer T+1 liquidity, making them a better option than locking money in a fixed deposit
“Investors can look at short-duration and money market funds of up to one year maturity as the current yields in that segment are trading at attractive valuations given the expected increase in banking sector liquidity and a potential delay in rate hikes,” says Puneet Pal, head, Fixed Income, PGIM India Mutual Fund.
Target maturity funds
Individuals who have a long-term horizon should consider target maturity funds as they have an average maturity ranging from one to 10 years. These funds invest in government securities, bonds of public sector companies and state development loans and hold them till maturity. The smart move is to pick a fund whose maturity lines up as closely as possible with when you will actually need the money.
“If you are looking at a genuinely long-term horizon, target maturity funds with mostly AAA public sector exposure make a lot of sense as the core of your fixed income portfolio,” says Sonam Srivastava, founder, Wright Research PMS.
The AAA-rated public sector bonds offer a spread of 50 to 70 basis points over similar government securities, and the credit risk is negligible in practice, since issuers like Rural Electrification Corporation, National Highways Authority of India have that implicit sovereign backing. That extra spread is real money you collect every year for a risk that, in this segment, has almost never shown up.
Disclaimer: This article is for informational purposes only and should not be construed as tax or investment advice. Investors should consult a qualified tax professional or financial adviser before making investment decisions based on changes in tax laws.
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