The sentiment in the bond market remained weak during January 2011 as the market anticipated negative outcomes from the inflation announcement as well as from the Central Bank’s policy action at the Third Quarter Review Meeting that was to be held on 25 Jan, 2011. Furthermore, RBI made it quite clear at the review meet that the main concern for the economy is the rising inflation, which means that there will be more rate hikes in the coming months. Fundsupermart  Research Team views that this continuous increase in interest rates will definitely impact the demand in the real economy and will lead to a moderation of GDP growth in Fiscal Year (FY) 2011-12. In the month of February, the bond market will be keenly watching the Union Budget for FY2011-12 to know: the government’s fiscal deficit target the borrowing programme outlined for FY2011-12 the disinvestment plans

We are of the view that all these factors along with RBI’s stance on inflation will decide the direction of the bond market in the coming year. 

In this scenario, on account of the rising interest rates and the tight liquidity situation, we advise:

• Investors with a time horizon anywhere from 3 months to 24 months can lock-in their money in FMPs (available with varying maturities) at the prevailing high rates. To invest in FMPs click here
• Investors with idle cash in the savings account should look at Ultra-Short Term Funds. The Recommended Funds in this category includes  Birla Sun-life Ultra short term Fund and BNP Paribas Money Plus Fund.
• Investors with a time horizon between 6 - 9 months should consider Short-Term Funds as we are expecting liquidity to remain tight for some more months. The Recommended Funds in this category include Reliance Short Term Fund and Templeton India Short Term Fund.
• Aggressive investors can also consider parking 5% of their corpus in long-term Gilt Funds and our top picks are ICICI Prudential Gilt Fund Investment Plan and Birla Sun Life Government Securities Fund