Invest in dynamic bond funds to navigate impact of interest rate cycle

[view original post]

The (RBI) has raised policy rates twice since May and expectations of further rate hikes are not ruled out. Against this backdrop, are advising investors to consider in (MF) schemes that take exposure to debt securities with wide-ranging maturities.

of such schemes alter allocations depending on their interest-rate outlook.

“After more than a 100-basis point (bp) sell-off in the bond market over the past year, the return potential of debt has improved significantly. We suggest investors increase allocation to in a staggered manner with a two- to three-year holding period,” says Pankaj Pathak, fund manager-fixed income, Quantum MF.

In May, the increased the rates by 40 bps and another 50 bps in its June monetary policy. As the central bank started increasing rates, yields on 10-year government securities, too, hardened.

are not looking to increase maturities due to expectations of further rate hikes. At present, they see value in bonds maturing between three and five years.

If yields move up further, as expected by fund managers, medium- to short-duration funds will be less volatile, compared to long-duration ones.

“We used the recent rise in bond yields to deploy portfolio cash into three- to five-year government bonds. For the core portfolio, we continue to like three- to five-year maturity bonds, which, in our opinion, offer a critical balance between duration and accrual yield,” adds Pathak.

Typically, the prices of fixed-income securities are dictated by prevailing interest rates. Interest rates and prices are inversely proportional. When interest rates decline, the prices of fixed-income securities increase. Similarly, when interest rates are hiked, the prices of fixed-income securities come down.

In the past year, such funds, on average, have given returns of 2.02 per cent, while in the three-year period, they have managed to give returns of 5.6 per cent. Some funds in the category have given returns in the range of 3-6 per cent in the past year.

are typically more volatile than short-duration and medium-duration debt funds. However, they also have the potential to give superior returns across different interest-rate scenarios over higher investment tenures.

Dear Reader,

Business Standard has always strived hard to provide up-to-date information and commentary on developments that are of interest to you and have wider political and economic implications for the country and the world. Your encouragement and constant feedback on how to improve our offering have only made our resolve and commitment to these ideals stronger. Even during these difficult times arising out of Covid-19, we continue to remain committed to keeping you informed and updated with credible news, authoritative views and incisive commentary on topical issues of relevance.
We, however, have a request.

As we battle the economic impact of the pandemic, we need your support even more, so that we can continue to offer you more quality content. Our subscription model has seen an encouraging response from many of you, who have subscribed to our online content. More subscription to our online content can only help us achieve the goals of offering you even better and more relevant content. We believe in free, fair and credible journalism. Your support through more subscriptions can help us practise the journalism to which we are committed.

Support quality journalism and subscribe to Business Standard.

Digital Editor