The debt mutual funds are seeing a volatile phase with uncertainty about the rate movements.
The headline CPI inflation (combined) for April 2014 further accelerated to three months high at 8.59% (y-o-y) from 8.31% in March 2014. Meanwhile, the wholesale price index (WPI) based inflation eased to 5.20% in April 2014 compared to 5.70% in March 2014. All the sub-groups contributed the decline in inflation for April 2014.
The RBI in its first bi-monthly Monetary Policy Statement, 2014-15, kept the key policy rates unchanged, in line with market expectations, after raising the repo rate by another 25 bps in the third Quarter Review of Monetary Policy in January 2014. The central bank stated that policy stance will be firmly focused on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016. However, RBI raised concern that some demand pressures still persists, looking at the stickiness of retail inflation at around 8 per cent.
In these volatile times, the investors should choose the debt funds wisely and optimise returns. The term debt funds not only mean all fixed income funds. There is a marked difference between accrual funds and those that choose a duration strategy.
The funds which follow the duration based strategy invest in long term bonds and benefit from the fall in interest rates. They earn from capital appreciation along with the coupon of the bond. However, these funds are exposed to interest rate risk and if the interest rates move up these funds bear capital losses. All long term Income and Gilt Funds follow the duration based strategy.
Accrual strategy is followed by funds which generally buy short term instruments and prefer to hold till maturity, this reduces the interest rate risk. FMPs, Ultra Short term bond funds and Short term bond funds follow this strategy.
The inflation movement is unclear as it is difficult to predict the influences of volatile global commodity prices and the monsoon.
Thus, in such volatile situations if an investor needs a steady return from his debt funds portfolio and is not ready to take higher risk he should invest in accrual based funds. As these funds invest in short-term instruments, the accrual strategy funds explicitly avoids duration risk. Also, by investing only in safe, highly rated instruments, it minimizes the credit risk of its portfolio.
Meanwhile, the investors who can ride with the volatility associated with the fund can go in for duration based funds. The funds can generate better return in a time when the interest rates are set to move downwards.
However, prudent investors should choose a mix of funds having extreme shorter maturities and few with longer maturities. The strategy will effectively give a portfolio with balanced duration and will capture the opportunities. Last but not least use the strategies for tactical allocation.
The headline CPI inflation (combined) for April 2014 further accelerated to three months high at 8.59% (y-o-y) from 8.31% in March 2014. Meanwhile, the wholesale price index (WPI) based inflation eased to 5.20% in April 2014 compared to 5.70% in March 2014. All the sub-groups contributed the decline in inflation for April 2014.
The RBI in its first bi-monthly Monetary Policy Statement, 2014-15, kept the key policy rates unchanged, in line with market expectations, after raising the repo rate by another 25 bps in the third Quarter Review of Monetary Policy in January 2014. The central bank stated that policy stance will be firmly focused on keeping the economy on a disinflationary glide path that is intended to hit 8 per cent CPI inflation by January 2015 and 6 per cent by January 2016. However, RBI raised concern that some demand pressures still persists, looking at the stickiness of retail inflation at around 8 per cent.
In these volatile times, the investors should choose the debt funds wisely and optimise returns. The term debt funds not only mean all fixed income funds. There is a marked difference between accrual funds and those that choose a duration strategy.
The funds which follow the duration based strategy invest in long term bonds and benefit from the fall in interest rates. They earn from capital appreciation along with the coupon of the bond. However, these funds are exposed to interest rate risk and if the interest rates move up these funds bear capital losses. All long term Income and Gilt Funds follow the duration based strategy.
Accrual strategy is followed by funds which generally buy short term instruments and prefer to hold till maturity, this reduces the interest rate risk. FMPs, Ultra Short term bond funds and Short term bond funds follow this strategy.
The inflation movement is unclear as it is difficult to predict the influences of volatile global commodity prices and the monsoon.
Thus, in such volatile situations if an investor needs a steady return from his debt funds portfolio and is not ready to take higher risk he should invest in accrual based funds. As these funds invest in short-term instruments, the accrual strategy funds explicitly avoids duration risk. Also, by investing only in safe, highly rated instruments, it minimizes the credit risk of its portfolio.
Meanwhile, the investors who can ride with the volatility associated with the fund can go in for duration based funds. The funds can generate better return in a time when the interest rates are set to move downwards.
However, prudent investors should choose a mix of funds having extreme shorter maturities and few with longer maturities. The strategy will effectively give a portfolio with balanced duration and will capture the opportunities. Last but not least use the strategies for tactical allocation.
