For over a year, fund managers have been advising investors to stay put in funds with ultra short-term and short-term durations. With the Reserve Bank of India (RBI) continuing its hawkish stance, it was necessary for investors not to commit money for a longer term.
But Tuesday's half yearly review of the monetary policy has changed that view. Fund managers, enthused by RBI’s proposed pause, are now advising investors to put money in longer-term schemes.
Nilesh Shah, president, corporate banking, Axis Bank, says: "It makes sense for investors to go for longer-term schemes now because there would be a reinvestment risk in shorter-term schemes." That is, fund managers are going to find it increasingly difficult to take a call on papers to invest in the short term. If they hold longer maturity papers in their portfolio and rates were to slip, the scheme will suffer.
"If you were positioned only for a rising interest rate scenario, then you need to change your strategy now," adds financial planner, Arnav Pandya.
In a rising rate scenario, short-term funds with 9-18 month tenure and fixed maturity plans (FMPs) did well. But, fund houses have already been anticipating a lower interest rate scenario for some time. "We believe interest rates should stabilise in the next six to eight months before there is any real rate cut. Yet, we have already been advocating a shift from ultra short-term funds to medium- and long-term funds for our investors, as these benefit from the fall in interest rates," says Puneet Pal, vice-president and debt fund manager, UTI AMC.
Investors should now be looking at longer-term funds like pure income funds, gilt funds or even dynamic bond funds. Currently, the long-term income funds available offer a maximum tenure of 18 months to four years. "Though their returns cannot be guaranteed, the returns usually reflect those given by corporate bonds that these funds invest in. Currently, these are in the 9-10 per cent range," says Amar Ranu, senior manager, research and advisory, Motilal Oswal Securities.
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Investors having an investment horizon of less than that could even look at dynamic bond funds. These have one to three year tenure. However, the funds are actively managed and could have their entire product mix changed from gilt, bond or even money market depending on the market conditions. Returns here depend on how right or wrong the fund manager's call goes. One-year returns from Birla Sunlife and IDFC dynamic bond funds have been around 8.86 and 8.26 per cent, respectively.
| HOW THEY COMPARE | ||||||
| Fund category | 1-week | 1-month | 3-month | 6-month | 1-year | 2-year |
| Liquid | 8.32 | 8.64 | 8.60 | 8.52 | 8.20 | 6.35 |
| Ultra ST Fund | 8.84 | 8.52 | 8.80 | 9.02 | 8.52 | 6.68 |
| ST Fund | 9.36 | 6.60 | 7.88 | 9.18 | 8.04 | 6.74 |
| Income | 6.76 | 1.08 | 5.64 | 7.30 | 6.88 | 5.89 |
| Gilt ST | 5.20 | 2.28 | 5.72 | 5.76 | 5.47 | 4.72 |
| Gilt Medium & LT | -3.12 | -13.32 | 0.96 | 3.10 | 4.66 | 4.41 |
| Returns below 1 yr are annualised and those above one year are based on CAGR. (Returns in %) | ||||||
Gilt funds offer tenures ranging from 9 -18 months. However, these have not been very popular with retail investors because of low returns of four-five per cent in the last one year. Since rates are expected to start going down before some time, investors can opt for a gradual shift in their portfolio allocation. So, those with shorter-investment horizons of one year could look at allocating up to 30 per cent of one's surplus in short-term funds of one-year maturity.
Any capital gains from the sale of units before a year will be termed as short-term capital gains tax. The gains will be added to the income and taxed according to slab. Profits earned after a year will be considered as long-term capital gains tax and will be taxed as debt funds. So, a 10 per cent tax will be levied without indexation benefit or 20 per cent with indexation benefit.