In its latest Mutual Fund Debt Monthly Report, DSP Merrill Lynch has recommended a focus on short duration funds in light of the bearish outlook.
With the gilts trading in a tight range and many negatives including higher borrowing programme, higher crude oil prices, the Fed Funds rate hike and the borrowing calendar pushing the 10-year yield from 6.55 per cent to 6.69 per cent, it recommends short-term investments in cash funds only.
The long-term recommendation remains unchanged with focus on floating rate funds, short-term debt funds and fixed maturity plans.
The report notes the efforts of the government to talk the market up despite the spate of negatives. Its survey on the reverse repo rate shows that 69 per cent of the fund managers expect the RBI to keep the repo rate unchanged while 31 per cent expect a hike in the rate.
The 13 fund managers polled preferred investing in the floating rate funds over the one- year horizon followed by long-term gilt funds.
While some funds placed short-term debt in the premier position there were no takers for the income funds or short term gilt funds.
Debt Mutual funds in March witnessed outflows of Rs 99 billion (Rs 990 million) as investors paid taxes and positioned for year-end considerations. Apart from investor positioning, there are signs that institutional money is leaving the system.
The largest outflow was from floating rate funds followed by cash funds. Surprisingly, income funds witnessed inflows in March. Amidst all this, lower inflation, better liquidity and no fuel price hikes turned out to be the only positives.
With fund managers remaining bearish their strategy has been reducing average maturities and increasing cash levels.
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