Mumbai: Wealth managers said investors can build a debt fund portfolio consisting of ultra short-term funds, banking and PSU debt funds and credit risk funds after the finance minister announced tax cuts for companies.
After the announcement, bond yields have moved up by 20 basis points, with the 10-year benchmark advancing to 6.8% on fears the Reserve Bank of India may not cut interest rates further as the stimulus could lead to a rise in fiscal deficit. Analysts said the bond market sell-off on Friday is a knee-jerk reaction to concerns over revenue loss arising out of tax reductions.
Though the fiscal deficit could rise, fund managers expect the RBI to cut rates in its upcoming policy meet by as much as 25-50 basis points, as it attempts to boost economic growth. India’s economic growth slipped to a six-year low of 5% in the June quarter.
“To boost economic growth, the government has done its bit and now the RBI will have to cut rates,” said Raj Mehta, fund manager at PPFAS Mutual Fund. He expects the RBI to cut rates by 25-40 basis points.
Wealth managers are recommending investors to stick to a mix of bond funds.
“Investors could spread their fixed income portfolios across ultra-short term, banking and PSU debt and credit risk funds that could help them earn as much as 7.5-8%,” says Ashish Shanker, head (investment advisory), Motilal Oswal Wealth Management.
Credit funds, which invest in riskier papers, could give investors returns up to 9% post expenses. Banking and PSU debt funds with exposure to AAA rated banks and PSUs offer investors return up to 7%.
“Investors who understand credit risk and are okay with some shortterm volatility should invest in highly diversified largely AA oriented credit funds as we see AA spreads widening over the AAA curve, making them attractive bets from a risk reward perspective,” says R Sivakumar, head (fixed income), Axis Mutual Fund.
Shanker believes the the fiscal deficit will surge to 0.6% of the GDP and could inch up to 4%. This would make it challenging for investors to make money in long-term bonds.
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