Switch to short duration now

MONEY MARKET AND CORPORATE BOND FUNDS CAN BE IDEAL OPTIONS AS YIELDS STABILISE

- SAIKAT NEOGI

AS THE RESERVE Bank of India has kept the repo rate unchanged, investors should consider short duration bond funds now. These benefit from stable yields and focus on earning interest income.

Top-performing short duration bond funds such as Axis and Nippon India's have given returns of around 10% in the last six months and around 9% in the last one year.

The yield curve has flattened, and short-to-medium-term bonds, with maturity of one to three years, are offering attractive carry without taking on excessive duration risk. Given the limited scope for further rate cuts, long-duration bonds have become less attractive now.

A core allocation of around 70% to accrual-focused short-tenure instruments can help generate stable interest income with lower volatility, while a satellite allocation of around 30% to long-duration assets can provide potential for capital appreciation if yields decline further. "This barbell approach allows investors to earn steady returns through accrual while maintaining some upside from rate movements, without taking excessive duration risk," says Nirav Karkera, head, Research, Fisdom.

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