Lakshmi Iyer, Chief Investment Officer (Debt) & Head Products, Kotak Mahindra Asset Management Company said that investors in a current scenario could look at target maturity funds from a passive ownership standpoint as well as funds like medium duration and dynamic bond funds.
Here are the excerpts from the interview:
Q: How do you see bond markets and yields if a long-awaited global index inclusion fails to take place once again?
A: We expect the announcement of index inclusion to be a sentiment positive for bond yields. The quantum of likely flows would be a function of what the actual percentage of inclusion would be. For the momentum to sustain, the timelines need to be well articulated.
Q: What are the factors that are driving the bond market currently apart from sentiments of inclusion in the global bond index?
A: Currently, bond markets are facing more headwinds than tailwinds. US bond yields have been on the rise given the expectations of further tightening by the US Fed. The H2 govt bond supply is expected to be announced by the end of the month, which also could increase uncertainty in yields. Lastly, the RBI MPC is expected to announce its rate decision, which is an important factor driving bond markets going forward.
Q: How much rate hike do you expect in the upcoming monetary policy?
A: We assign a higher chance of 50 bps rate hike in the upcoming policy, assuming US FOMC hikes rate by 75 bps with hawkish guidance.
Q: What will be the CPI inflation and growth forecast in the upcoming policy?
A: We believe that the CPI forecast may remain unchanged as the trajectory so far seems to be broadly in line with the RBIs forecast. Given the headwinds on global growth, we could see some minor tweaks on the growth forecasts.
Q: Which tenor bonds are a good bet for investment in the rising interest rate and inflation scenario to earn better returns?
A: Given the flat nature of the yield curve, we like the 4-7 year sovereign curve.
Q: Which debt schemes are better for investors in the current interest rate scenario?
A: In such a scenario, investors could look at target maturity funds from a passive ownership stand point as well as funds like medium duration and dynamic bond funds. Floating rate funds could also be an add on in the current elevated interest rate environment.