Bet short-term if you are risk averse investor

By M H Ahssan

Debt fund investors are a confused lot. They are unable to take a call on where interest rates are headed. On one hand, the government is saying that the interest rates would come down further. On the Other, it is expected to borrow more money, raising fears of hardening of interest rates.

No wonder, investors do not know whether they should go for short-term schemes or long-term ones. Or, whether they should look for alternative safe investment avenues.

‘‘Yes, there is a lot of confusion because of the contradictory situation. If the government borrows more from the market, the rates will go up. But the government has to keep the rates down in a slowing economy, so it will have to take measures to keep the rates low,’’ says Mukesh Dedhia, director, Ghalla & Bhansali Securities, a wealth management firm.

‘‘If the government opts for monetisation to bridge the gap, then there won’t be any impact on the rates. Considering the particular situation we are in, there is no harm in doing it,’’ Mukesh Dedhia adds.

‘‘Investors should be ready to face a little risk if they are investing in the debt schemes now. Sure, the 10-year (government security) yield can still go down by 50-75 basis points, but it doesn’t seem like happening immediately,’’ says a mutual fund manager, who doesn’t want to be named. ‘‘In fact, a lot depends on how the RBI would handle situation if there is a slight pick-up in credit during the middle of the year.’’

According to financial advisors, if you are risk averse, you should opt for short-term schemes than the long-term ones.

This is because though there is scope for long-term funds to deliver higher returns, it involves a higher element of risk because of the uncertainty in the money market.

‘‘If the yield comes down by 100 to 200 basis points, you have a chance of making 10-12% from long term funds, but there is a bit of risk involved,’’ says Dedhia. As for an alternative avenue for investment, he suggests arbitrage funds.

‘‘They have given a return of around 8% in the last one year. If you hold it for than a year, the returns would become tax free as these funds are classified as equity schemes,’’ he says.

Arbitrage funds generate fixed income by exploiting the arbitrage opportunities in the cash and equity derivative markets.

They typically take advantage of the price difference of the stocks in the cash and future market. These funds are useful for risk averse investors looking for fixed-income returns at a rate above the average fixed income rate of return.