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Mutual Fund Investors Advised to Rebalance Portfolios Amid Inflation Concerns

Strategic Insights

— 1 min read

Mutual fund investors in India may need to reassess their fixed income portfolios as the Reserve Bank of India's focus on controlling inflation has caused short-term interest rates to rise. Financial planners recommend liquid funds and target maturity funds for risk-averse investors, while those with a higher risk appetite could allocate to credit risk funds. With short-term rates tightening, liquid funds could yield better returns, potentially increasing from the current 3-3.3% to 4-4.5%. Investors are advised to allocate to liquid/liquid plus categories for short-term needs and gradually add to target maturity funds to lock in higher rates.

Key Takeaways:

  • Financial planners recommend liquid funds and target maturity funds for risk-averse investors, while those with a higher risk appetite could allocate to credit risk funds.
  • With short-term rates tightening, liquid funds could yield better returns, potentially increasing from 3-3.3% to 4-4.5%.
  • Fund managers expect the 10-year benchmark government bond to rise further by 25-50 basis points.
  • The RBI is expected to increase the repo rate by 50 basis points this financial year.
  • Liquid funds, which invest in securities with maturities of less than three months, are considered one of the safest debt categories.
  • Debt schemes that invest in short-term papers are best poised to benefit from a rise in bond yields.
  • Rising interest rates lead to mark-to-market losses for long-term debt schemes like gilt funds and income funds.
  • Investors could earn 6.4-6.6% on target maturity funds maturing in 2026 or 2027.
  • Some fund managers believe investors looking to earn 7-8% over a three-year period could allocate about 10% of their portfolio to credit risk funds.

Statistics:

  • Potential returns from liquid funds: 4-4.5%
  • Current returns from liquid funds: 3-3.3%
  • Expected increase in the 10-year benchmark government bond: 25-50 basis points
  • Expected increase in the repo rate: 50 basis points this financial year
  • Potential returns from target maturity funds: 6.4-6.6%
  • Suggested allocation to credit risk funds: 10% of the portfolio

Sources:

  • Nirav Karkera, Research Head, Fisdom
  • Akhil Mittal, Senior Fund Manager (Fixed Income), Tata Mutual Fund
  • Pankaj Pathak, Fund Manager, Quantum Mutual Fund
  • Devang Shah, Co-head, Fixed Income, Axis Mutual Fund

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