RBI Hikes Policy Rates: What Should Debt Mutual Fund Investors Do?
Debt fund investors don't lose patience - the worst is likely behind us! Build up a 25% to 40% allocation to long-term debt funds over the next four months, if you've got a two year plus time horizon
In light of the sharp hikes in crude prices and above-expected inflation numbers, the RBI effected its first-ever rate hike in as long as 4 years, by increasing the Repo Rate by 25 basis points from 6% to 6.25%. However, the yield on the 10-year G-Sec rose just 8 basis points from 7.83% to 7.91% in response. Notably, the Reserve Bank persisted with a more or less 'neutral' stance, defying prior expectations of a more hawkish tone.
It's no secret that debt mutual fund investors, especially those new to mutual funds as an asset class, have grown deeply frustrated over what has been one of the most bearish phases for the debt markets in years. In fact, I had predicted a tough year ahead for bond funds as a whole at the end of 2017, in this article here.
That said, it's a fact that a lot of monetary tightening is already factored into current bond prices, which have taken a beating in recent times. Just like stocks, bond prices too move in anticipation of events - not so much upon the actual confirmation of the event itself.
In this article four months back, I had categorically advised debt fund investors to gradually (over six to eight months) start buying into longer duration debt funds via SIP's or STP's, and the same advice stands well even right now. Debt Fund investors with an investment time horizon of more than two years can definitely consider a 40% allocation to long-term debt funds, built up over the next 4 months or so.
The core of your debt portfolio (60% to 75%) should still go towards a mix of credit risk funds and corporate bond funds. Improvements in the credit environment - as measured by an improved upgrade to downgrade ratio- augur well for the Indian corporate bond market segment.
To sum up: one, debt fund investors don't lose patience - the worst is likely behind us! Build up a 25% to 40% allocation to long-term debt funds over the next four months, if you've got a two year plus time horizon. Divide up the rest equally between corporate bond funds and credit risk funds. The next two years should be a whole lot brighter.