MUMBAI: RBI governor Raghuram Rajan’s decision to cut the repo rate by 25 basis points is sure to result in some cut in interest rates in bank fixed deposits ( FDs), making it tougher for risk-averse investors who depend on interest income to meet their expenses. In such a situation, debt investors willing to take a slightly higher risk can opt for debt mutual funds to earn returns which could be higher than FD rates, fund managers said.

Ritesh Jain, CIO, Tata Mutual Fund, and Rahul Goswami, CIO-Fixed Income, ICICI Prudential MF, both said that the time was ripe for investors to look at shortand medium-term bond funds, which invest in debt instruments of two-five years maturity. Investors could also in vest in mutual funds schemes which have higher yielding bonds in their portfolio. These schemes are called accrual funds. In short and medium-term bond funds, investors can expect 8-8.5% yearly returns, while in accrual funds it could be even higher. Fund managers also pointed out that when the rate of interest in the economy is at a high level and it starts falling, the prices of bonds, which are inversely related to yields, start rising.

In such a situation, investors can profit from the rising price of bonds. However, this is not possible when the rates have been on a downward spiral for a while, which is the situation now.

“Given that we are near the end of the rate cutting cycle, it would be difficult to generate extra return arising out of fall in yield. Hence, investors should look to invest in short-term bond funds,” Jain said. Agrees Goswami: “We see inflation remaining benign and macroeconomic factors supportive for central bank to continue its accommodative stance, going forward. Also, earlier rate cuts may get transmitted in bond yields in the near term, leaving scope for yields to fall further,” Goswami said.

“We recommend short-to-medium duration funds as they may offer better risk-adjusted returns here on. Accrual funds, which follow buy-and-hold strategy, are also recommended as they reduce reinvestment risk for long-term debt investors.”