Time to look at liquid & ultra short-term funds, say experts
, ET Bureau|
Dec 29, 2017, 08.17 AM IST
Mumbai: Rising bond yields are prompting investors to avoid long-duration debt, and they might switch their fixed-income portfolio instead to liquid and ultra-short term funds after benchmark yields hardened on Thursday.
"Given the uncertainty surrounding inflation, fiscal deficit and GST collections, the bond markets could be choppy in the near term," said Vikram Dalal, managing director, Synergee Capital. "Investors would do well to stick to liquid and ultra-short-term bond funds until this volatility evens out."
Yields on the benchmark 10-year government bonds climbed 18 basis points, the second highest in a single day in 2017, to touch 7.4 per cent, a level not seen since July 2016. The 10-year benchmark is up 99 basis points from its low of 6.41 per cent touched earlier in July this year.
Rising consumer inflation, a dip in GST collections, and a signal by the government that it may breach its fiscal deficit target of 3.2 per cent of gross domestic product have cumulatively led to a spike in the benchmark yield. Total GST collections in November stood at Rs 80,808 crore, down from the provisional estimate of Rs 83,346 crore in October and a peak of over Rs 94,000 crore in July, data released by the government this week showed.
Analysts would keenly track the levy collections as GST rates for 200 items were sharply reduced from November 15. Also, the CPI-based retail inflation rose to 4.88 per cent in November from 3.58 per cent in October, mainly on account of rising food and oil prices.
"Inflationary expectations are increasing due to high oil and metal prices," said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund. Analysts also believe that the rise in crude oil prices may sustain, especially after the Organization of the Petroleum Exporting Countries (OPEC) decided to maintain production cuts through next year.
Investors in long-tenure gilt funds have suffered losses in the past three months. According to data from Value Research, Debt (Medium and Long term Gilt Category) returns are down 1.05 per cent in the past three months. By contrast, liquid and ultra-short-term funds have gained 1.56 per cent and 1.36 per cent, respectively, in the same period.
"The fiscal position is facing a challenge because of the government's dilemma over boosting growth and supporting farm incomes ahead of the 2019 elections," said Pankaj Pathak, fund manager, Quantum Mutual Fund. He advised investors to avoid long-term income funds and gilt funds as he doesn't believe interest rates will soften anytime soon.
"Given the uncertainty surrounding inflation, fiscal deficit and GST collections, the bond markets could be choppy in the near term," said Vikram Dalal, managing director, Synergee Capital. "Investors would do well to stick to liquid and ultra-short-term bond funds until this volatility evens out."
Yields on the benchmark 10-year government bonds climbed 18 basis points, the second highest in a single day in 2017, to touch 7.4 per cent, a level not seen since July 2016. The 10-year benchmark is up 99 basis points from its low of 6.41 per cent touched earlier in July this year.
Rising consumer inflation, a dip in GST collections, and a signal by the government that it may breach its fiscal deficit target of 3.2 per cent of gross domestic product have cumulatively led to a spike in the benchmark yield. Total GST collections in November stood at Rs 80,808 crore, down from the provisional estimate of Rs 83,346 crore in October and a peak of over Rs 94,000 crore in July, data released by the government this week showed.
Analysts would keenly track the levy collections as GST rates for 200 items were sharply reduced from November 15. Also, the CPI-based retail inflation rose to 4.88 per cent in November from 3.58 per cent in October, mainly on account of rising food and oil prices.
"Inflationary expectations are increasing due to high oil and metal prices," said Dwijendra Srivastava, chief investment officer (debt) at Sundaram Mutual Fund. Analysts also believe that the rise in crude oil prices may sustain, especially after the Organization of the Petroleum Exporting Countries (OPEC) decided to maintain production cuts through next year.
Investors in long-tenure gilt funds have suffered losses in the past three months. According to data from Value Research, Debt (Medium and Long term Gilt Category) returns are down 1.05 per cent in the past three months. By contrast, liquid and ultra-short-term funds have gained 1.56 per cent and 1.36 per cent, respectively, in the same period.
"The fiscal position is facing a challenge because of the government's dilemma over boosting growth and supporting farm incomes ahead of the 2019 elections," said Pankaj Pathak, fund manager, Quantum Mutual Fund. He advised investors to avoid long-term income funds and gilt funds as he doesn't believe interest rates will soften anytime soon.
