Prime Debt recommendation: Taking shelter in a shaky market
Your search for a safe haven in these shaky market ends here!
Aarati Krishnan
Aarati is a leading voice in the Indian financial services space. She has been tracking and writing about the entire gamut of financial products and regulations for over 25 years now. She is currently Editorial Consultant for the Hindu Business Line and was earlier a consulting editor for Value Research Online. For her pioneering work in writing on financial services and the economy, she was awarded the Shriram Sanlam award for excellence in Financial Journalism thrice. LinkedIn | Twitter
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22 thoughts on “Prime Debt recommendation: Taking shelter in a shaky market”
Dear Aarati
After the RBI Bazooka of 50 bps rate cuts, how should one think about investing in corporate bond funds? Two questions: 1) Is this the right time to invest as part of debt allocation particularly after the monetory policy event of 50 bps rate cut? 2) I am looking to move some of my funds from FDs into bond funds as part of my debt allocation expecting 8-9% over next 2-3 years. Is this reasonable? Thank you.
While accrual funds – corporate bond and credit risk – are the better option after these rate cuts, the return expectation from such funds should be 7 per cent or thereabouts today. Yields on corporate bonds have fallen significantly recently. This is why we give our tactical calls anticipating policy actions and not after them.
In view of interest rate cuts, it is prudent to reduce or exit exposure to Floating Rate Bond funds.
However, you have recommended investing in Nippon India Floating Rate fund. Please explain.
Thanks,
Prakash
We do not generally recommend investors keep switching in and out of debt funds based on rate cycles. The churn will be too high and there is little need to do so.
To take advantage of rate cycle movements, we give tactical calls. For example, we have earlier given duration calls in gilts, locking into higher yields with target maturity funds, etc. Such tactical calls do not negate the recommendations we give under Prime Funds, whether in debt or in equity. Prime Funds recommendations are also given to meet a variety of investor needs/timeframes.
For short-duration funds or even floating rate funds, it is absolutely fine to remain invested in them over a long-term period as well – combining different maturities in a long-term debt portfolio is actually useful and will help capture opportunities across rate cycles. – thanks, Bhavana
Thanks
The gilt funds where you had given a tactical duration call are still in prime funds with a buy call. Why is that so if it was tactical and the yields from gilt are under pressure as the article says? Vidya has said in another comment that for gilt, once the cycles plays out returns tend to be muted. Do you think the cycle has not yet played out and there’s still place for a substantial rate cut?
Our Prime debt recommendations are clearly classified by the investor’s holding period. For holding periods beyond 5 years duration funds are still a reasonable bet, as this will allow enough time for the cycle to play out. our tactical calls are meant to help investors take advantage of return windows over shorter periods
Hi Aarati / PI team,
Thanks for your timely article. I’m trying to redeem my existing barbell debt funds based on last years recommendation and buy the corporate bond funds recommended above. Is this a right strategy if my investments in debt are more tactical in nature? Since MF capital gains now are part of slab tax rate, does it mean I’m exempt up to 12L under section 87A rebate?
Yes as it was a tactical call you can make the switch. As per our understanding, if your MF proceeds are taxable at slab rates the rebate will apply
Thank you !!
Hello Aarti, I have parked some money in HDFC Floating Rate Fund for the past 6 months. Would you advise switching this investment into HDFC Corporate Bond Fund now for better Returns? Kindly advise
Yes I would
The link to Prime Funds is not working, the link to the URL needs to be corrected (http://https//staging.primeinvestor.in/prime-funds/ –> additional https// causing this issue)
Thanks for pointing out. Done.
Hi Arati – What should be the holding period given this is a tactical call? I presume you will provide exit reco also when the time is ripe. Also – Please advise on taxation too. What would be the long term and short term tax implication?
In the context of corporate debt – a tactical opportunity is usually to lock into goood yields so that your entry point is well timed. Corporate bond funds can be part of any long term portfolio. If returns go close to double digit take some profit and continue to hold them as part of any long-term portfolio. Unlike gilt, where once the cycles plays out returns tend to be muted, corproate bond funds manage their holdings to balance between accrual and capital appreciation (duration). So unless the fudn is bad, we are unlikely to give an exit.
Thanks…and please advise about taxation also.
We are not competent authorities to advice on taxation. For MF taxation you can refer to thsi article: https://staging.primeinvestor.in/reports/mutual-fund-taxation-a-guide/
The articles is good as always.
One query – Instead of adding new fund to the portfolio, is it better to top up ABSL Floating Rate Bond Fund or ICICI Pru All Seasons Bond Fund as both have significant allocation to NCD and Bonds?
Thank you! Topping them up wouldn’t have the same effect as they may have exposure to sovereign bonds with lower yields than corporate bonds.
> Take shelter in corporate bond funds
Just a small feedback – this might sound like, or at least easily interpreted as (imho), or be at least one of the interpretations, sell/exit equity and move to safer instruments like corp bonds because bad times are coming. Just saying. Again, imho.
Valid feedback. 🙏 Not meant like that at all..everything we write is assuming an asset allocation framework.
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