"From a general market point of view, I think the five-to-10-year segment looks very reasonably priced," said Mahendra Jajoo, chief investment officer of fixed income at the fund house that manages over 96 billion rupees ($1.17 billion) of debt assets. India's 10-year benchmark 7.26% 2032 bond yield was at 7.2250% on Friday, while the liquid 5-year 7.06% 2028 bond yield was at 7.0541%. In April, the Reserve Bank of India (RBI) maintained a surprise status quo on interest rates at 6.5% when a majority were expecting a rate hike of 25 basis points. Jajoo expects the central bank to remain on an extended pause. "Now the bar for them to hike is equally tough because inflation is on the decline and expected to fall further. Once the public is more confident that interest rates have peaked and are coming down, we will see a lot of inflows in the duration funds." The fund manager does not expect the large supply of government bonds to create pressure on long-term rates as there is demand from investors such as insurance companies.
While Jajoo is overweight on government bonds in debt schemes, he says the investment should be a combination of both government securities and corporate bonds as the latter are offering a reasonable spread.
There is a scope for corporate bond yield spreads to widen further, he says, while adding they are currently narrower than historical levels as the balance sheet quality of corporate India has also improved.
The removal of indexation benefits in debt schemes by the government has resulted in an initial disappointment, but once that is over investors will again see value in the debt funds, Jajoo says.
Post tax tweaks, debt investors can look at target maturity funds. When markets get confident that interest rates will come down, duration funds may appear very attractive with a fantastic expected return profile, he adds. ($1 = 82.1500 Indian rupees) (Reporting by Bhakti Tambe; Editing by Sohini Goswami)
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