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Surging bond yields may derail your short-term plans

Author: Debasis Mohapatra/Wednesday, November 15, 2017/Categories: Bonds

Surging bond yields may derail your short-term plans

Mumbai: Investors in debt fund schemes of mutual funds may have to rethink their investment strategy, as yields of government bonds are shooting up. According to fund managers, returns on government securities, which are popularly known as gilt funds, are likely to dip in the near future.

Yields and returns have an inverse relationship. So, when the yields of bonds rise, prices come down, which, in turn, pull down returns for investors. Notably, yields of 10-year benchmark government securities have touched 14-month high figure of 7% in the recent days. Rising crude oil prices, concerns over rising inflation and uncertainty over revenue collections post-GST rollout also pose significant risks to expected returns in bond funds category.

“Investors should be relatively cautious in long-term debt funds as yields of G-Secs have gone up,” chief executive officer of Quantum Mutual Fund Jimmy Patel told The Finapolis on Wednesday. “Situation is quite fluid as of now. Apart from geopolitical risks like events in Saudi Arabia, elections in key states will also determine the future direction of bond yield,” Patel said. Investors should rather look at dynamic debt funds to get higher returns, he said.

Two types of bond funds

Bond funds are of two types. While one type stay invested in long-tenured bonds and government securities, others like dynamic bond funds have no fixed tenure. Fund manager decides the average tenure of these kind of funds according to the interest rate cycle.

Apart from dynamic bond funds, fund managers are also prescribing short-term and liquid funds in the debt fund space for higher returns. “Investors with short-term investment horizon should not stay invested in gilt funds. Short-term, ultra short-term and liquid funds will give them better returns in the current scenario,” Dwijendra Srivastava, chief investment officer- debt of Sundaram Mutual Fund, said.

According to Srivastava, rising oil prices and uncertainty over revenue collections by the government post-GST implementation are likely to pose a challenge in meeting the current year’s fiscal deficit target. This, in turn, may push bond yields further down. “In this scenario, short-term investment horizon will not suit gilt fund investors,” he said.

Srivastava, however, said that people with long-term investment horizon should stay invested in gilt and other long-term funds as long-run macro fundamentals of India look good.

According to data furnished by Association of Mutual Funds in India (AMFI), share of debt-oriented schemes stood at 39.5% of total assets of the mutual fund industry by the end of October  2017. It was at 45.4% in the same period of previous year. Liquid and money market schemes had 19.5% share in the overall asset base during this period.

Though the share of individual investors increased in the overall asset base by the end of October this year, institutional investors still dominate the debt fund space with 91% share in liquid and money market schemes and 62% in debt-oriented schemes.

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