While tax rules changes areunfavourable, we need to keep in mind that despite favourable tax rules, theindustry saw a net outflow of around 150,000 crs over the last 18 months fromactively managed debt funds (other than short and ultra short duration) –largely due to poor visibility of returns in an interest rate upcycle. Thereverse could be true now that the macro environment is changing and we areheading into an interest rate down-cycle. Tax is perhaps the second levelconsideration – visibility of returns is the primary one.
We are at or close to a peakin interest rates globally and locally. Will have to be very watchful of datafor next couple of months before taking aggressive bets on bonds. That said,its more a timing issue – medium term, we are looking at a global and domesticbonds bull market.
RBI is signalling thatinflation is coming down. GDP growth target at 6.5% for FY24 seems a bit high –and might just give room to RBI to cut rates if actuals trend a bit lower.Markets have priced in 1 to 1.5 rate cuts over the next 12 months. RBI wouldideally want US Fed to commence its rate cut cycle before it can do so inIndia. We could get good opportunities to go long duration over the next 2-3months.
Overnight yields can movedown in the next 12 months by 75-100 bps, 5 yr by 45-50 bps and 10 yr by 25-30bps. The real story in terms of returns potential is likely to be at the shortto medium parts (2-5 yr segment) of the curve.
Road to 8-9% returns: Goodthing about the tax rule changes is we no longer have an anchor time horizon of36 months. Bond cycles don’t last that long and many investors had to keeptrading off tax vs timing. Actively and nimbly managed duration funds have thepotential to deliver the 8-9% returns over 12-18 months that investors look for.This is also a good time to look at credit risk funds – bond issuances arepicking up, pricing is judicious and the credit environment looks sound for thenext 18-24 months.
HNIs who want to defer taxare pushing for an all weather super solution that can opportunisticallyallocate across duration, accrual, credit etc and thus remain invested for verylong periods of time. Industry is likely to respond with fund of fundssolutions that will allocate across a variety of underlying schemes dependingon market dynamics.