In a surprise move, the Reserve Bank of India increased the repo interest rate by 40 basis points (bp) to 4.4 per cent on May 4, 2022.
In response, yields of benchmark Indian government bonds with 2, 5-, 10- and 14-year tenors rose nearly 32 bp, 37 bp, 26 bp and 22 bp as of 3:25 pm on May 4. , 2022, as per Edelweiss Mutual Fund’s note on RBI Monetary Policy Review.
When yields rise, bond prices fall, resulting in a mark-to-market loss for debt mutual funds.
Vishal Dhawan, CEO and Founder, Plan Ahead Wealth Advisors, said, “Existing debt fund investors should avoid any backlash at this point of time. He suggested to continue investing till the horizon of the investment. He also said that “till maturity”. Investors investing in Target Maturity Fund need not worry as they get locked in the yield at the time of investment.” Target Maturity Funds (TMFs) usually hold investments till their stipulated maturity date and after that, the investors Distribute maturity proceeds.
fresh investment
For new investors in the fixed income segment, experts recommend investing in short term fixed income products.
Investing in short-term fixed income products including debt funds and fixed deposits will benefit investors in reinvesting maturity proceeds at a higher rate of interest in the future.
Experts also suggest investing some portion in medium to long term funds, if one can keep the investment till maturity.
Suyash Choudhary, Head of Fixed Income, IDFC Mutual Fund, also said, “We continue to believe that 4-5 year sovereign bonds provide very good medium-term risk-adjusted returns and provide investors with ample exposure to this segment. Should keep moving forward. The next few months for those relevant investment horizons.”
Pankaj Pathak, fund manager, Quantum AMC, said, “With the 5-year government bond yield close to 7%, while the potential repo rate is 5.5%-6.0%, it is tempting to allocate to bond funds on fixed deposits. ,
Note, in this case, it would be better to stagger your investments rather than make a lump sum investment.
Debt funds also score well in terms of taxes. When investments are held for more than 3 years, these are taxed at 20% after indexation. If held for less than 3 years, short-term capital gains are taxed at the individual’s slab rates.
Going forward, bond market participants expect the RBI to hike the repo rate to the pre-pandemic level of 5.15 per cent in the next few meetings. Therefore, both existing and new investors in debt funds should be prepared for the high volatility that comes with rising interest rates in the short term.