Look at debt for short term

Chances of a rate cut in the near future present an opportunity for investors to park their money for short-term... but time is running out fast

If you8217;re sitting on cash wondering where to put money for the next 18 to 24 months,there8217;s one good option. Debt can be a good space to be in. The era of high interest-rate environment is changing now both in terms of expectations as well as the indications from the Reserve Bank of India RBI. The change,however,might be painfully longer due to the high inflation which will determine what decision the RBI takes in the months to come.

Returns from bonds are inversely proportional to the interest rate scenario. So,if the interest rates start coming down further,the yields will come down with it and the returns will start going up. When interest rates are in an upward trend,the prices of bonds go down. This means they can be bought at cheaper rate. Similarly,when the rates are in the downward spiral,the bond prices start moving up,meaning thereby that they can be sold at higher prices.

However,the movement either ways may not be secular and depends on a number of variables. The two most important variables are growth and inflation. Inflation,which almost went out of control in 2010-11,forced the RBI to raise interest rates to curb demand in the economy. The RBI8217;s mission was to kill inflation. But it had a direct impact on growth as the cost of capital went up due to the high interest rates. December 2011 was the month when the RBI paused after raising interest rates by 375 basis points 3.75 per cent from March,2010 to October,2011.

The possibility of rate cuts was factored-in by the end of December,2011 which saw bond yields coming down in January 2012. Concerns over impending slowdown in growth forced the RBI to look at cutting cash reserve ratio CRR by 125 basis points 1.25 per cent since January. However,the best opportunity to lock-in one8217;s money was till November-December 2011 as the yields were on high levels. The question arises whether there8217;s still money to be made on the interest rate volatility or the window of opportunity is closed now.

While it would have been prudent to buy fixed-income products,that invest in debt,few months back,it might not be too late for the investors with more than one year time horizon. There is no point waiting and trying to time the interest rate cycle now. Some profit is already lost by investors who were sitting on sidelines to put money in bonds. A lot of positives have been factored in and one should not miss the bus now, says Chaitanya Pande,Head Fixed Income,ICICI Prudential AMC.

D Subbarao,Governor,RBI,recently indicated that growth remains secondary when he said,you cannot control inflation without sacrificing some growth. After all,you have to contain demand. When you contain demand,growth comes down. So there is no way of bringing down inflation without sacrificing some growth. He also said that the communication we try to give and the message we try to convey is that this short-term sacrifice of growth is a small price to pay for bringing inflation down so that in the medium-term the growth is secured. This clearly means that the downward trajectory towards rate cuts would not be as sharp as many bond speculators assumed few months back.

However,with the way the GDP growth has tapered off in the last 4 quarters,it would take a lot of effort from the government and the RBI to bring back the confidence needed to spur investments so that the growth targets are met. One of the key requirements for sustained growth is availability of capital at reasonable rates so that the investments in the economy continue. Therefore,lowering of interest rates is an eventuality to revive the economy. If this happens,the bond prices are definitely going to rally in the medium term.

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Investors who have horizon of more than 12 months should definitely look at long-term bonds,long-term fixed income mutual funds and dynamic bond funds. Reduction in interest rates is an eventuality. Only the timing is an issue. Therefore anyone who has invested for a time horizon of 12-24 months and is prepared to ride the ensuing volatility is likely to benefit from the rally in the bond prices, says Raghvendra Nath,Managing Director,Ladderup Wealth Management.

However,before you decide to go ahead and shop for debt products,here is a word of caution. We think investors should restrict their investments to bonds of high credit quality issuers as the current yields are currently quite attractive with adequate liquidity in the secondary markets and not get carried away by higher rates offered by lower rated issuers. Also,given the challenging environment in the domestic and the global markets,one should not target high returns from the bond market in the short term. We expect the RBI to cut rates in stages and with the current volatility in the markets,investors can get opportunities to buy bonds at current or lower levels in future as well, says Karthik Srinivasan,Sr VP,Co-head,Financial Sector ratings,ICRA.

Therefore,there is no point in waiting and trying to time the interest rate cycle now.