Stick to shorter duration debt funds, lending rates unlikely to come down

Investors may also spread their investments across several non-convertible debentures, currently promising upward of 9 per cent annually

With inflation continuing to remain under control, the central bank felt it had an opportunity to support growth, and delivered a second consecutive rate cut of 25 basis points (bps).

Despite the 50-bps rate cut since February, the 10-year government security (G-sec) and bonds of longer maturity have not rallied.

“This segment of the bond market is affected more by factors like fiscal deficit, which has been rising, and the government’s borrowing calendar, which is heavy in the first half of the fiscal year. Shorter-term bonds, on the other hand, have rallied on account of rate cuts and liquidity injection by the Reserve Bank of India,” says R Sivakumar, head-fixed income, Axis Mutual Fund. His advice: Continue to invest the bulk of your portfolio in shorter-term bond funds whose duration does not exceed two-three years.

Other experts concur. “It is too early to pronounce interest rates will decline in a secular manner. For that to happen, there has to be sufficient liquidity in the interbank market, which is not the case. So, investors should stick to debt funds with a 2.5-3-year maturity profile,” says Joseph Thomas, head of research, Emkay Wealth Management.

Some parts of the debt market continue to be risky. Says Akhil Mittal, senior fund manager, Tata Mutual Fund: “Long-term funds could be volatile. Retail investors should also stay away from credit risk funds as there is uncertainty in that space.”  

Only those with a longer investment horizon of three-five years and keen to play the entire interest-rate cycle may invest a small portion of their debt fund portfolio in dynamic bond funds, adds Sivakumar.

But what happens to your fixed deposits (FDs)?

Despite the earlier 25-bps cut, banks have barely cut rates by 5-10 bps. Most believe that the FD rates may not be affected much, especially as they are competing with small savings schemes offering attractive rates.

So, banks cannot afford to cut deposit rates if they wish to attract more deposits. While government banks are currently offering 6.4-6.85 per cent interest rate, private banks and small finance banks (SFBs) are offering 50-100 bps more. Take some allocation to SFBs, but the bulk of your FDs must be with established commercial banks.

Fixed maturity plans are an alternative that can fetch 8-8.5 per cent return. Investors may also spread their investments across several non-convertible debentures (NCDs), currently promising upward of 9 per cent annually. Avoid NCDs with ratings below AA+.

Home loan rates may decline marginally. “With their cost of funds coming down, I expect banks to reduce home loan rates by 10-15 bps,” says Aditya Mishra, founder and chief executive officer, SwitchMe, a digital home loan broker.

Customers need to manage their loans proactively. If the loan rate they are paying has become higher than the best rates available, they need to act. “Your bank may be offering a good deal to its new customers and not to you. Negotiate and switch to your bank’s best rate by paying a small amount of around Rs 3,000,” says Mishra.

If things don’t work out within your own bank, switch to another lender. While banks themselves do not charge much for a switch, the stamp duty can be considerable in a place like Mumbai (0.2 per cent of the loan amount, which would equal Rs 20,000 on a loan of Rs 1 crore), though it is lower in places like Delhi at Rs 100 only.