Mutual fund investors shun long-term funds amid rising rate expectations

The Reserve Bank of India (RBI) changed its stance last week, prioritizing inflation over growth. Despite the RBI’s pivot, it’s unclear when the first rate hike will take place. As a result, investors in mutual fund debt systems are likely to avoid long-term bond funds in the short term. Short-term debt funds, typically up to three months in duration, are expected to see larger inflows as short-term rates have begun to rise.

Very short-term and short-term funds are considered low-risk funds in a rising rate scenario, while long-term funds remain more sensitive to changes in interest rates. Sanjay Pawar, Fund Manager – Fixed Income, LIC Mutual Fund, said: “In the current environment with huge borrowing underway, a shift from dovish to neutral by RBI may result in higher terminal rates. students. The greater the duration, the impact. Thus, in a scenario of rising interest rates accompanied by a higher weekly sovereign supply mainly in the long term, lower duration regimes may present lower risk compared to a higher duration regime.

The yield on benchmark 10-year bonds jumped above 7.1% last week after the Reserve Bank of India (RBI) revised its inflation forecast and redirected its efforts to fight against inflation.

Going forward, experts say, in particular, inflows will be seen in the liquid, ultra-short and short categories, while bank funds/PSUs, corporate bond funds and gilts will see outflows in the less in the short term. “Tactical investors will turn to short-duration funds in the coming months and capital inflows are likely to be seen in the liquid, ultra-short and short duration categories, while long-term funds such as banks/PSUs, enterprise funds and gilts are likely to see outflows,” Mahendra Jajoo, CIO, Fixed Income, Mirae Asset Management, told FE.

However, if there is more clarity on rate hikes in the RBI’s upcoming policies, long-duration bond funds could attract some interest from investors after three to six months, the experts added. .

Comments are closed.