While the markets are on a roller coaster ride, investors looking for some stability may look at bonds.
According to Puneet Pal, Head-Fixed Income, PGIM India Mutual Fund, it is expected that the Indian bond yield curve will remain flat amidst favourable demand supply dynamics at the longer end of the curve though the progress of monsoons will be a key factor to access the trajectory of food Inflation and subsequently RBI’s stance on the monetary policy.
The scope for rate cuts in India is on account of high real positive rates and the need to encourage private investment and there is a fair probability of rate cuts in the second half of FY2025. The RBI is also likely to draw comfort from the start of the monetary easing cycle in advanced economies.
“With growth rates hovering over 8 per cent, it will be a wait and watch approach as we observe inflation and growth trends combined with actions taken by the US Federal Reserve over the next quarter. The earliest rate cut by RBI could be in Q4 FY 2025,” says Jayaprakash, K, Chief Growth Officer, Altgraaf, an online investment platform for alternative fixed-income investments.
According to Tata Mutual Fund, from the Indian Fixed Income Market point of view, fall in commodity prices is a positive for CPI inflation. RBI is expected to be more amenable to rate cuts in the coming months if the global economy situation deteriorates.
What Should Investors Do?
“Bond yields tend to move in advance of rate action and investors can look to increase allocation to fixed oncome at every uptick in yields. We expect long bond yields to continue to drift lower over the next couple of quarters. We expect the benchmark 10-year bond yield to go towards 6.50 per cent by Q4 of FY25,” says Pal.
“Investors with medium to long term investment horizon can consider dynamic bond funds having duration of 6-7yrs with predominant sovereign holdings as they offer a better risk-reward currently,” says Pal.
Dynamic bond funds are mutual funds that invest in debt securities with varying maturities, actively managed to adjust to changing interest rates and market conditions. They aim to maximise returns by shifting allocations between short-term and long-term bonds, offering flexibility and potential higher yields compared to traditional bond funds.
Investors having an investment horizon of six to 12 months can look at money market funds as yields are attractive in the one-year segment of the curve also,” says Pal.
Money market funds are mutual funds that invest in short-term, low-risk debt instruments like treasury bills and commercial paper. They offer high liquidity, stability, and relatively lower returns, making them ideal for conservative investors seeking a safe place to park cash.
“Equity investments will still be a great choice for long term investments if someone can look past short and medium term volatility,” says Jayaprakash.
