The time is ripe and right for considering an allocation in Debt Funds now. In fact, the time do it is now.
The much-awaited and anticipated rate cut by the RBI has come in effect last week, in the form of a 0 .25% cut in the repo rate, the reasons for which we have stated into in earlier posts . i.e., softening rate of inflation, a reducing current account deficit and the falling price of crude oil.
Bond yields and Interest rates are inversely related. When the interest rate in an economy falls, demand for existing bonds with higher yield (coupon, interest) increases.So if you lock in on a fund now with a high YTM (yield to maturity), it will give you a better risk-adjusted return in coming period.
The RBI is expected to continue cutting interest rates in 2015 and we anticipate a 0.75% rate cut during the course of 2015 for the following reasons;
- Long term inflation target of sub 6%.
The rate of Inflation has been brought down from the high of double digit days last year a more manageable figure of a single digit. The RBI is targeting a sub-6% rate of inflation for the next few years to come. And current consumer inflation figures are extremely encouraging.
- The falling price of crude
For the first time in years, the price of petrol and diesel in India has fallen. The steady fall in the price of crude oil is the reason for this, and the reduction in the current account deficit as well, on account of lower foreign currency outflows to pay for fuel. The price of crude oil will continue to fall and be a factor in further anticipated cuts in the interest rate.
- Lower Government borrowing Target
The Indian government borrows every year from its citizens in order to fund its budgetary deficit. This year, on the back of the PSU divestment program and a falling fiscal deficit, the Government of India is planning to borrow less, which is good for inflation and the chances of a cut in the repo rate.
What are the opportunities?
- Accrual Fund:This type of funds invest in corporate bonds with high yields (rate of interest is at least 1% more than what you get on Government bonds) in stable companies for low duration typically for 1 to 3 years.
- Duration Fund:This type of fund invest in government securities (GSECs) with a better yield than what is currently prevalent. This mostly comes with sovereign investment and so there is no credit risk but with high duration, average maturity age of securities may range from 5 to 10,15 years. Your entry into the fund at the right time matters to lock in better returns.
And since the time to act is now, enough talk here. Get in touch with us today and we’ll help you get in touch with the active investment opportunities that exist out there now.