When should you increase your exposure to debt MF schemes?

In the present environment, short term income funds with good underlying credit quality, have the potential to offer the best risk adjusted returns for investors with a 6 months to 1 year investment horizon.

However, investors with longer investment horizon could also look at allocation to long duration products such as income and gilt funds provided they are comfortable with short term volatility in those products.  Compared to Fixed Deposits (FDs), open ended mutual funds offer certain benefits such as liquidity and potential for capital gains in falling interest rate scenario.

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Given the current attractive short term yields, short term products look more attractive on risk-adjusted basis but investors with longer investment horizon can also make allocation to long term products which are likely to benefit when interest rates start falling. The allocations between the two categories would largely depend on the risk appetite and investment horizon of the investors.

Even though RBI may not hike rates, lot of other factors such as inflation trajectory, fiscal situation, domestic growth and  global factors such as risks emanating from the European debt crisis and worries over a double-dip in the US - would play a more important role in influencing our bond markets over the medium term.

Having said that, I believe that investors should gradually increase their allocations to open ended bond products (instead of locking all their money into close ended Fixed Maturity Plans), given that we are at the end of the rate hiking cycle and there is good possibility to benefit from yields moving lower over the next year or so.

-Shriram Ramanathan

The author is a Portfolio Manager - Fixed Income in Fidelity Worldwide Investment