Fund managers may shift attention towards accrual funds for higher yields

Fund managers may gradually shift their attention towards accrual funds in search of higher yields, even as investors continue to favour shorter-term debt funds. 

Accrual funds invest in companies having a lower credit rating, often with expectations of an improvement in their rating. Experts believe a compression theme is evident in select AA names as initial fears of downgrades and defaults recede, and portfolios may selectively look to capture opportunities in the space.

“We believe opportunities in the AA space make for an attractive play for investors with risk appetite. However, investors must remain vigilant and focus on portfolio granularity and liquidity, while identifying investment opportunities in this space,” said a recent note by Axis Asset Management.

R Sivakumar, head of fixed income at the AMC, says the bar for the next rate cut is set high, given the recent trajectory on inflation, and this can change only if there is a significant change in the economic outlook. The Reserve Bank of India (RBI) has cut the repo rate by 140 basis points this year. 

“This is not the time to be defensive and hold very short-duration money market instruments, but assets which can give you reasonable yields. One could look at longer-term securities, such as the 10-year government securities, which have priced in significant amount of rate hikes already. Alternatively, you could look at some of the higher-yielding AAA- and AA-rated corporate bonds in the shorter duration of three years and below,” said Sivakumar.

According to experts, the yield curve has steepened quite a bit, implying that the market is already discounting future rate hikes. While the overnight rates are close to 3.25 per cent, the three-year rates are upwards of 5 per cent. The yield on 10-year government securities stood at 6.19 per cent on Wednesday. 

The RBI, on Tuesday, said it would conduct simultaneous purchase and sale of government securities under open market operations for an aggregate amount of Rs 20,000 crore in two tranches. 

“Fund managers will eventually shift to AA names over the next six-12 months. They have already started getting into AA papers mid-June onwards. But it is difficult to find quality and reasonably priced names at this juncture, and it is not a win-win situation,” said a senior fund manager.

“Investors have lost a lot of money in credit play and that memory is still fresh in their minds. Risk-taking will return eventually. Whether it takes one year or two years, however, is anybody’s guess,” said Dwijendra Srivastava, CIO-debt, Sundaram MF.