With yields seen peaking, investors can look at long duration funds

Fixed income investors with an appetite for risk can consider adding duration to their portfolios and lock in to the high yields. Fund managers believe yields are close to their peak as the Fed is in the last stage of rate tightening and the risks to yields moving higher have greatly diminished making the risk-reward favourable for long-term investors to add long duration funds with a 4-5 year maturity to their portfolios.

Over the last one week, the failure of two US regional banks has raised fears of a contagion risk spreading across the financial sector. Given this, fund managers believe the Fed will turn its attention to growth and financial stability, thereby opting for an easy monetary policy. This along with easing inflation, makes it a good case for investors to add duration to their fixed income portfolios.

“Concerns on growth and financial stability point to easier than expected monetary conditions. If this contagion in the global banking system continues, monetary policy will continue to be easy, making it a good time to allocate some money to long duration bonds with a 5-10 year maturity.” says Sandeep Bagla, CEO, Trust Mutual Fund.

Fund managers believe current yields are high enough for investors to lock in.

“Yields are close to a peak and there are low chances of them spiking up. The risk/reward gravitates towards a long duration position,” says Sandeep Yadav, head (fixed income), DSP Mutual Fund.

Fund managers also expect inflation to ease, paving the way for peak rates or even a cut in rates. “Going forward inflation is expected to trend down on a favourable base effect, stabilising commodity prices and declining pricing power due to slow demand recovery. We expect headline CPI inflation to fall to around 5% mid of this year and average around 5.3% in 2023-24,” says Pankaj Pathak, fund manager, Quantum Mutual Fund

Financial planners believe investors could look at target maturity funds that mature over 5-7 years as the yields are attractive. They say while a further 25 basis points hike in interest rates by the Fed and subsequently in India, cannot be ruled out, rate hikes are in their last phase and this is an opportune time for investors to lock into high yields with a 3- year time frame. Fund managers also believe with softening inflation, the troubles in the global banking system could lead to an easy monetary policy which could benefit long tenure bonds.”Investors could opt for target maturity funds that have only government securities in their portfolio, as the current spread over government securities is not attractive for other securities,” says Rupesh Bhansali, head (distribution), GEPL Capital. Rupesh recommends target maturity funds that will mature in 2027-2029, have only government securities in portfolio. In such funds, one can earn 7.3-7.45% before accounting for expenses.