In this article we determine facts and provide reason for including Income funds in the fixed income portfolio.
Our economy is on the downward trend since 2011, with GDP hovering around 6%. Other macro economic indicators as well as weekly and monthly statisticslike IIP numbers also show no sign of relief and the change the the trend. Although, inflation has lowered a bit, but fiscal and current deficit are still posing a grave problem to our economy as a whole.
In July 2012, our recommendation to investors was to park their investments in Short-Term funds with the horizon of 1 year, as we were anticipating reforms to be taken up by the government. However, not much was done in this direction.
INFLATION
We all are aware of the central bank's stance that to tackle inflation is its core responsibility. In the mid quarter monetary policy review do December 2012, the headline inflation was below RBI's projected levels. The same is expected to remain for the rest part of 2013-14. If the government take measures to reduce fiscal gap, and if the currency shows signs of appreciation that would have positive impact on the inflation front.
GOVERNMENT BOND's DEMAND SUPPLY EQUATION
In the current scenario, RBI actively manages liquidity in the banking system. Banks have been borrowing heavily (in the range of INR 80,000 crore to INR 1,00,000/- Crore) under LAF (Liquidity Adjustment Facility) is well above the comfort limit of INR 60,000/- Crore under LAF (Liquidity Adustment Facility) or 1% of Net Demand and Time Liabilities. Another important point to note here is that demand for government securities from banks which is set to rise on account of banks adopting play safe due to their Non Performing Assets (NPA's). Bankscurrently have exposure to Statutory Liquidity Ratio (SLR), well above stipulated ratio of 23%. All these factors would contribute towards the rallying, that could be foreseen in the bond market.
WHERE YOU SHOULD INVEST NOW
In the backdrop of above points, we have decided to shift our stance and suggest that investors start taking ex exposure to long term debt funds. All those who are well versed with the fixed income market, know that their is an inverse relationship between interest rates and bind prices. Thus, whenever there is an expectation that interest rates will be on the downward spiral, yields on the bonds fall resulting in increase in Bond prices. In such scenario, investors with thehorizon of 1 year should invest in Income Funds. Our recommended funds in this category are Templeton India Income Builder Account, DWS Premier Bond Fund and Canara Robeco Imcome Fund.
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researchteam@cogentadvisory.com
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Disclaimer:
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