Debt Investors should brace for Volatility

Debt Investors should brace for Volatility


Let not the RBI keeping policy rates silence you, debt mutual fund investors should brace themselves for volatility in the coming months, according to Debt Mutual Fund Managers.  They are asking investors to stick to short duration Debt Mutual Funds and Corporate Bond Funds.

  • The Reserve Bank of India held key policy rates in its policy review meeting to maintain a balance between inflation management and revival of growth.
  • The MPC felt that given the evolving growth-inflation dynamics, it would be appropriate to maintain status quo.
  • Hence it decided to keep the policy repo rate unchanged and proceed with the accommodative stance as long as there is need to revive growth, while ensuring that inflation remains within the target.
  • These decisions are said to be in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth.
  • The banking regulator indeed maintained an accommodative stance to revive growth, while ensuring that inflation remains within target.
  • Further, Debt mutual fund Managers believes that the Debt Market is entering a tricky place. It is felt that in-spite of the rate cuts that we saw in the last year, the market yields have not come down. Now with so much more happening in the system, the transmission mechanism will become more challenging.
  • Further, the experts add that if from there, the RBI is going to be supportive of the Government’s growth mission, they will have to focus on the open market operations or the operational twist, rather than focusing on rate cuts.

Experts’ Opinion:

  1. It is also felt that Rate cuts look cosmetic now because of the rigidity in the system. Jajoo says investors should expect volatility in the debt market. “Market sentiment looks stable to positive at this point, but it will not stay like that unless aggressive OMOs and OTs come its way. I would suggest investors to stick to short duration bond funds if they have a 18-30 month investment horizon, corporate bond funds are a safer choice in accrual. Brace yourself for higher volatility in 2020.”
  2. Lakshmi Iyer also says it is not going to be a smooth journey for the bond market: one way down or upward. “The yields are notching lower and there might be vulnerability there also. It is going to have a share of volatility this year.” She adds that investors should brace for volatility and stay in the cluster of short duration funds, banking & PSU debt funds and a tail-end allocation to corporate bond funds. “I would say that it is really important to keep your risk and investment horizon she adds.

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