Avoid chasing yield blindly in a falling interest rate scenario

Stay away from high-credit-risk products; sacrificing liquidity is okay if you have long horizon

- SANJAY KUMAR SINGH & KARTHIK JEROME

Following the 50-basis-point (bp) rate cut by the Reserve Bank of India (RBI) on June 6, banks have lowered their fixed deposit (FD) rates by 25-50 bps. While investors should explore better-yielding options, they must not compromise on safety.

Debt funds: From duration to accrual Debt mutual funds (MFs) have delivered better returns than FDs over the past couple of years amid softening rates.

The repo rate now stands at 5.5 per cent. "The RBI has suggested that there is not much scope for further rate cuts. This means the duration strategy, which has been performing for the past two years, may not yield the same kind of performance. Investors should gradually move to accrual-oriented strategies over the next three months—categories like money market funds and low-duration funds," says Mahendra Kumar Jajoo, chief investment officer, fixed income, Mirae Asset Investment Managers (India).

Devang Shah, head—fixed income, Axis Mutual Fund, also believes that long bonds have limited room to rally further. "Rate cuts are likely to be limited—one or two—and that too only if there is a growth shock or if inflation moves even lower," he says.

A significant portion of the rally in debt funds was fuelled by liquidity infusion. "As there is ample liquidity in the system, investors may consider incrementally shifting their investments into short and medium-term funds," says Shah.