Skip to main content

Duration Strategy in Bond Funds

Top SIP Funds Online 


Inflows in income funds went up by 44% in calendar year 2016 as compared to the previous year; and in 2017 inflows are already 8% higher than in 2016. Thanks to the downward rate cycle in domestic economy, income funds have seen more investors and inflows. In 2015 and 2016, many income and dynamic bond funds increased their duration to take advantage of the falling rates and fared well, delivering double-digit returns. Duration measures the change in price of a bond as interest rates change. Bond prices rise with fall in rates. However, the pace of rate cuts has since slowed and duration-led returns are now harder to come by. The last 1-year average return for dynamic bond funds category is at 5.85% and for income funds category it is 6.85%. Just like equity schemes, these funds too are more volatile in the short term and tend to give relatively stable range in returns when you consider a 3- to 5-year period. 

Where did the return go? 

The moderation in returns is led by fewer rate cuts last year and an expectation that the rate-cut cycle itself is near an end. Experts talk about one more cut at the most, which is priced in by the market already. The 10-year government security (g-sec) yield moved from 6.2% in November last year to 7% now, leading the bond market correction. External risk factors, concerns on fiscal deficit and inflation have also impacted bond markets negatively in recent months. 

Globally, interest rates are moving up and we don't see domestic rates moving in the opposite direction for too long. Moreover, over the last year we are seeing the return of commodity super cycle and crude prices on an upward trajectory. This impacts the domestic import bill significantly. With the recent bank recapitalisation announcement, there are fresh worries about fiscal slippages. This, consequently, leads to worries on inflation and currency.

Many experts believe that for now the rate cycle has turned negative and risk-reward in high g-sec oriented funds is not favourable.

A lot of the expected risk on the fiscal front may already be priced in. Yields may not fall sustainably from here. However, it is not looking very bearish either (risk of rising yields). Inflation may rise as a result of commodity prices moving up, but we don't expect a significant shift. There is no clear directional shift to look forward to in yields, it's going to be more about tactical shifts in the near term.

Shifting away from duration

Looking deeper into individual fund performances shows there are outliers that have delivered 8-10% return even in the last year. Where did they manage the higher returns from? These are funds where first, the duration in the portfolio is lower than the category average; and second, there is a higher proportion of the portfolio that relies on accrual or interest income from corporate bonds and debentures. 

Income funds are inherently volatile in nature owing to their exposure to duration through government securities. On the other hand, dynamic bond funds—if the fund manager chooses to—can move out of these securities meaningfully to curtail losses in a negative rate cycle. Currently, the range of duration in dynamic bond funds is quite wide (see graph). Funds that are still keeping long-dated g-secs and maintaining a high duration, are delivering a lower return. Those that have shifted strategy and focus on yield from bonds rather than opportunity in the rate cycles, are the ones performing better in the past year or so.


How to go forward with Investments

The question remains, how should you approach your recent investments in these funds? Both these types of funds are opportunistic in nature and maximise returns in the brief periods when interest rates fall. If you can time the entry and exit into these schemes with the rate cycle, you will be able to benefit from the potential double-digit returns and exit before the trend changes. 

However, for retail investors managing such precise timing is not a viable option.

In dynamic bond funds, fund managers keep readjusting their strategy based on the market, which results in smoother returns in 3-5 years. Average 3-5 year returns for the category, seen over the last 20 quarters, show a consistent range of 8-9% annualised return from both these categories. 

Dynamic bond funds give managers the flexibility to move across the spectrum of securities, depending on where the opportunity is. The call isn't always accurate but the flexibility to shift means one needn't stay where the opportunity has ended. 

Remaining invested for 3-5 years also means moderating your return expectation lower from the double-digit returns seen in previous years. Long-term income funds are riskier as they tend to maintain duration regardless of the market, owning to the fund investment objective. For short-term parking of money, both the categories are inappropriate thanks to the inherent volatility; and for those looking at medium- to long-term allocation, it should be at least 3 years for tax efficiency and smoother returns. 

Risks should not be ignored 

Asset markets move in cycles. The bond market in India saw a rally last year. Does this mean we are heading for a prolonged correction? It's hard to predict that. However, there is some negative impact thanks to factors such as sharply higher crude oil prices, and fiscal risks arising from government's bank recapitalisation plan. We turned negative on the duration cycle about 4 months ago. It is a relative strategy. We revisited whether g-secs presented a better opportunity or corporate bond-led portfolios, and found the latter to have a better risk-reward premium. This does not mean investing in credit funds where spreads have compressed. We prefer bond funds with higher-rated corporate bonds and limited g-sec exposure.

Think carefully before adding exposure to income and dynamic bond funds in the current market. Your choice may take longer than what you saw in the last year or two to reach the expected return. For investors who have a more long-term approach to investments, staying with their overall strategic asset allocation is more important. 

Given the current trend in interest rates, we aren't advising a very high allocation to dynamic bond funds; within the fixed income allocation, a 20%-25% in these funds is suitable. A bullish phase may have warranted higher allocation. It is important for investors to remain diversified across assets and stick to the overall asset allocation with tactical changes.

For those looking to capatilize on opportunity presented by the rate cycle, it seems to have played out for now, with more risks in the near term than benefits.





SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com 

Popular posts from this blog

ULIP Review: ProGrowth Super II

  If you are interested in a death cover that's just big enough, HDFC SL ProGrowth Super II is something worth a try. The beauty is it has something for everybody — you name the risk profile, the category is right up there. But do a SWOT analysis of the basket, and the gloss fades     HDFC SL ProGrowth Super II is a type-II unit-linked insurance plan ( ULIP ). Launched in September 2010, this is a small ticket-size scheme with multiple rider options and adequate death cover. It offers five investment options (funds) — one in each category of large-cap equity, mid-cap equity, balanced, debt and money market fund. COST STRUCTURE: ProGrowth Super II is reasonably priced, with the premium allocation charge lower than most others in the category. However, the scheme's mortality charge is almost 60% that of LIC mortality table for those investing early in life. This charge reduces with age. BENEFITS: Investors can choose a sum assured between 10-40 times the annualised premium...

Section 80CCD

Top SIP Funds Online   Income tax deduction under section 80CCD Under Income Tax, TaxPayers have the benefit of claiming several deductions. Out of the deduction avenues, Section 80CCD provides t axpayer deductions against investments made in specific sector s. Under Section 80CCD, an assessee is eligible to claim deductions against the contributions made to the National Pension Scheme or Atal Pension Yojana. Contributions made by an employer to National Pension Scheme are also eligible for deductions under the provisions of Section 80 CCD. In this article, we will take a look at the primary features of this section, the terms and conditions for claiming deductions, the eligibility to claim such deductions, and some of the commonly asked questions in this regard. There are two parts of Section 80CCD. Subsection 1 of this section refers to tax deductions for all assesses who are central government or state government employees, or self-employed or employed by any other employers. In...

Am you Required to E-file Tax Return?

Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Buy Gold Mutual Funds Leave a missed Call on 94 8300 8300   Am I Required to 'E-file' My Return? Yes, under the law you are required to e-file your return if your income for the year is Rs. 500,000 or more. Even if you are not required to e-file your return, it is advisable to do so for the following benefits: i) E-filing is environment friendly. ii) E-filing ensures certain validations before the return is filed. Therefore, e-returns are more accurate than the paper returns. iii) E-returns are processed faster than the paper returns. iv) E-filing can be done from the comfort of home/office and you do not have to stand in queue to e-file. v) E-returns can be accessed anytime from the tax department's e-filing portal. For further information contact Prajna Capit...

IDFC - Long term infrastructure bonds - Tranche 2

IDFC - Long term infrastructure bonds What are infrastructure bonds? In 2010, the government introduced a new section 80CCF under the Income Tax Act, 1961 (" Income Tax Act ") to provide for income tax deductions for subscription to long-term infrastructure bonds and pursuant to that the Central Board of Direct Taxes passed Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010. These long term infrastructure bonds offer an additional window of tax deduction of investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly. Long term infrastructure Bonds by IDFC IDFC issued an earlier tranche of these long term infrastructure bonds on November 12, 2010. This is the second public issue of long-te...

What is Electronic Clearing Service (ECS)?

  As the name suggests, it's an electronic process through which money can be transferred from one bank account to another. According to RBI, this mode is usually used for regular payments and receipts, like distribution of dividend, interest, salary, pension etc. This mode is also used for collection of bills for telephone, electricity, water, various types of taxes, payment of EMIs , investments in mutual funds , payment of insurance premium etc. There are two types of ECS , like most other banking transactions, ECS credit and ECS debit. An ECS credit is used by a bank account holder , usually a large company or an institution for services like payment of dividend, in terest, salary, pension etc. If your mutual fund pays you dividend to your bank account, of all probability it is being paid through ECS credit.ECS debit, on the other hand, is used when a company or an institution is getting money from a large number of people. For example if you are investing in a mutual fund sc...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now