Shift to short-term debt funds ?

Investors in debt mutual fund schemes are ending up in few days because of the massive rush in bond yields which has resulted in sharp market-to-market loss. Long-term income funds, gilt funds and dynamic bond funds were slowed their value down between 0.25% and 2.5% on 8th February, 2017 after the benchmark bond yield jumped 31 basis points. Reserve Bank of India indicates that there would be very small cuts in interest rates in the coming days.

The bond yield has grown up 12 basis points on 9th February 2017, which will result in further losses for debt mutual fund investors. Within last 2 working days, yields have raised about 43 basis points to 6.86% on 9th February, which resulted in the downfall of bond prices.

safe and higher returns compared to bank FDs

Yields and prices are independent of each other i.e. when yields grow up, prices slow down and similarly when yields decreases, prices rises up. Long-term debt funds always try to ease themselves from hike in prices as they get gains from bond trading.

Short-term bond funds have less effect of all these. The RBI has changed their position from being accommodative to neutral. This suggests you that there is very less chance of cutting the rates in the coming month. The benchmark yield can reach to 7% in coming 2 months period.

The RBI may have to involve them in the bond market. To reduce supply and support prices to lower the yield, the Central Bank could buy back bonds from the markets. Many investors had started investing in debt mutual funds as bank fixed deposit rates fell and they deposited cash in banks post demonetization.

According to the data received from AMFI, investors have to put in Rs 1, 66,016 crore in income funds from 1st April.

Even after the rush of yields in two-days, there is no profit in their hands. With no further capital appreciation in sight, investors should either bet on 8% GoI Saving’s bonds or simple bank fixed deposits, which will give them safety of capital.

In the same way, investors with a time period of 1-2 years could choose short term debt funds, with a similar maturity profile.

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