With the RBI repo rate at 5.25% and inflation expected to remain elevated, the fixed-income landscape could be entering a phase where investors may need to rethink duration and deployment strategies.
Rather than locking into long-duration bonds at current yields, Puneet Pal, Head – Fixed Income at PGIM India Mutual Fund, believes investors should stay nimble and wait for potentially higher yield levels as the rate cycle evolves.
So, how should investors deploy ₹1 crore in fixed income with a three-year horizon? Pal recommends a staggered approach, with 40% in ultra-short-term funds, 20% in money market funds, 20% in liquid funds and 20% in short-duration funds.
He believes this allocation can provide flexibility to gradually move into medium- and long-duration funds when yields become more attractive.
In an interview with Kshitij Anand of ETMarkets, Pal also explains why bond funds may have an edge over buying individual bonds, how investors should think about FDs versus debt mutual funds from a tax-efficiency perspective, and why bonds should be viewed not as “boring” investments but as an important source of stability and diversification in a long-term portfolio. Edited Excerpts –
Q) With the RBI repo rate at 5.25%, are we still in an environment where investors can lock in attractive yields, or has the best part of the rate cycle already passed?
A) We are of the view that the MPC will hike rates going ahead given their Inflation projections of above 5% for the next three quarters and yields have little scope to move down from current levels.
Q) Is it better to lock in a 7% yield on a high-quality bond today or wait for potentially higher yields if inflation or oil prices push rates up?
A) We are of the view that it’s better to avoid high duration and wait for potentially higher yield levels. Given the ongoing geopolitical uncertainty and elevated yields across the developed market space , we believe its better to invest in shorter duration money market funds right now.
Q) If you had ₹1 crore to deploy in fixed income today with a three-year horizon, how would you construct the portfolio?
A) As we expect yields to rise, we will avoid long duration funds currently and will invest the corpus as 40% in Ultra short term Funds , 20% in money market Funds, 20% in Liquid Fund and 20% in short duration funds.
As and when yields start rising ,we will shift allocation from Ultra, money market and liquid funds into medium and long duration funds. We would reiterate that investors should invest in line with their risk appetite and investment horizons.
Q) How should investors divide their fixed-income allocation between government bonds, AAA corporate bonds, credit opportunities and money-market instruments?
A) Investors should start their allocation only as per their risk appetite and investment horizons along with investment objectives. Thus the allocation among the different debt instruments /funds should take into account all these factors.
Its difficult to enumerate the allocation to these different instruments in a generalised manner and will depend upon the factors mentioned above along with the stage of the interest rate cycle.
Read more: ETMarkets Smart Talk | Dhawal Dalal’s fixed-income playbook: Stagger bond bets, favour AAA debt
Q) Do you think that a bond fund make more sense than buying individual bonds, and when does direct bond ownership have an advantage ?
A) Yes, we think that investing in a bond fund makes sense rather than buying individual bonds as the investor has the advantage of a diversified portfolio with high liquidity. Investing in a bond fund will also have the advantage of a professional fund management team.
In our view, direct bond ownership may not be beneficial in majority of cases as the mutual fund industry offers debt products across the credit and duration spectrum.
Q) How important is tax efficiency when comparing FDs, bonds, debt mutual funds and government securities?
A) The tax efficiency is better in debt mutual funds as it offers tax deferment as gains are taxed only at redemption whereas in FD’s , the tax is leveed on accrual and in direct bond and government securities investment , tax needs to be paid on regular coupon payouts apart from any capital gains at the time of sale.
Q) What is the biggest misconception about bonds in India today—that they are boring, low-return investments?
A) We think that the biggest misconception is that investment in bonds is boring as they do not provide daily excitement.
Investors should realise that bonds/ debt investments provide stability to one’s investment portfolio and also has volatility. Every asset class has a role to play in building one’s investment portfolio and long term returns are generated through good asset allocation.
(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)
