Long-term debt funds see fresh inflows

After witnessing redemption for over two years in an uncertain interest rate scenario and amid rising bond yields, long-term income funds are seen attracting investors by the next quarter, fund managers said.

Over the last two years, the debt market has witnessed hardening of bond yields due to combination of global and domestic factors.

The rising global interest rates and rise in domestic inflation due to surging global crude oil prices led to fears of rise in local interest rates.

In such a bearish debt market, mutual funds suffered massive redemption in their long-term debt schemes.

Fund managers now expect interest rates to peak by January and once the overall rate situation stabilises, these schemes should be back in limelight.

Echoing this view, Sandeep Bagla, head-fixed income, Principal Mutual, said, "people are realising that interest rates are alright and once the interest rate environment stabilises, we would see more inflows in long term schemes. We expect inflows to start next quarter."

The Reserve Bank of India in its mid-term review raised the repo rate by 25 basis points to 7.25 per cent. It left other key rates such as reverse repo, bank rate, and the cash reserve ratio unchanged at 6 per cent, 6 per cent, and 5 per cent.

Fund managers feel there might be one more rate hike in January.

Ashvin Arora, managing director of Optimix said, "We believe that most of the interest rate cycle has already been played out. There may be one more in January and after that there should be some steadiness going in the market."

Arora said, "We have to wait for the interest rate cycle to play out," for attracting inflows in long-term debt schemes.

Rising bond yields impact the long-term schemes more than short-term.

In a rising bond yield scenario, long-term schemes, which invest in long tenure bonds, are more susceptible to capital loss than short-term funds.

On the other hand, when bond yields fall, long-term schemes gain more than short-term. In the month to Wednesday, the medium-term income funds recorded average return of 1.96 per cent while long-term gilt funds, which were the toppers among debt funds, gave 2.96 per cent average return.

Noting the positive performance, Mahindra Jajoo, head-fixed income of ABN Amro Mutual said, "given the fact that in last three-months, the performance of long-term schemes was steady, we may witness some interest in these schemes. Another month of consistent performance should attract investors."

Sanjay Prakash, chief executive officer of HSBC Mutual, advises investors to invest in slightly longer duration funds of over one year horizon.

He said, "Inflows (in long-term schemes) should begin by first quarter next year, because may be interest rate would peak by then and that's the logical time."