RBI status quo, likely
dampener for long-duration fund investors
The likelihood of the Reserve Bank of India (RBI) holding rates
steady for much of this fiscal could be a dampener for investors in
long-duration funds. Distributors and advisors sold long-duration funds to
investors in the past year anticipating a fall in interest rates.
Fund managers--many of whom have increased the duration of their
debt funds in the past few months--have also been caught on the wrong foot. For
example, several medium-duration funds of three-four years are running at four
years; medium-to-long duration funds of four-seven years are closer to seven
years and so on.
It's difficult to time the entry into such funds, said Dhaval
Kapadia, Director, Head, Products, Ambit Wealth. The growth-inflation dynamics
is such that it may not warrant a rate cut in the near future by the RBI.
Duration funds that include long-duration funds, gilt funds and
medium-to-long duration funds have seen inflows of over ₹8,000 crore in
FY24 and have returned anywhere between 6.25 per cent and 7.7 per cent in the
past year.
Accrual yields
The yields have not reversed meaningfully. And to that extent,
investors have not taken a big hit on their portfolios. Many fund managers are
still sitting on fairly long-duration and maturities, said Kapadia. The
kicker that investors were expecting from interest rates coming down, however,
has been delayed.
Bond prices and interest rates move inversely. The amount of
appreciation and capital gains is the highest with longer-duration securities.
Let s say an investor is investing for one year in a long-duration
bond fund that has a duration of seven years, giving a yield of 7 per cent. If
the yield rises 20 bps during this period, the returns will reduce by 1.4 per
cent (20 bps * 7 years) to 5.6 per cent, assuming there is no retracement of
yields.
We always maintained that rates cuts would happen in the second
half of 2024. We do not know the quantum, but when the first rate cut happens
the market will discount a series of rate cuts. That itself may result in
higher capital gains than the expectations built in at that point in time,
said Dwijendra Srivastava, Chief Investment Officer - Fixed Income, Sundaram
Mutual Fund.
Srivastava believes that investors with a long-term horizon who do
not want to time the market and are okay with duration volatility can stay
invested. That s because the accrual yield at 7-7.15 per cent is still decent
from a long-term perspective. Investors who came in, may be a year ago and want
to exit within three-five months, may face a challenge if there s a status
quo on rate cuts. These investors, he said, may not get the benefit of
capital appreciation.
Going forward
With policy rates remaining incrementally stable, we remain long
duration across our portfolios. The path of fiscal consolidation, demand-supply
dynamics in G-secs, and expectations of falling interest rates in the US,
Europe and in India make an interesting theme for a long-duration stance for
investors, Axis MF said in a note this month.
In March, Bandhan MF launched its long-duration fund with a
portfolio duration of beyond seven years. The long duration of the fund may
result in higher volatility than other debt funds, it said.
Morgan Stanley analysts said this week that the RBI is unlikely to
lower interest rates in the ongoing financial year, given India s robust
economic growth and changes in the US Federal Reserve s policy direction.
www.thehindubusinessline.com
dt. 19.04.2024