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

NPS for Tax Saving

The NPS is a great way to save tax if you don't mind locking in your money till you retire. Till last year, the taxability of the NPS was a big issue. But last year's Budget changed the rules and made 40% of the corpus tax free. The PFRDA wants that the balance 60% to be exempt from tax as well. The emphasis is on increasing pension coverage. So, allowing EEE status (to NPS ) is our major demand (in the Budget NPS is especially useful for investors who may have exhausted the `1.5 lakh investment limit under Section 80C but want to save more.   Another way the NPS can cut tax is by rejigging the salary.If a company deposits up to 10% of the basic salary of an employee in the NPS under Section 80CCD(2d), the amount will be tax free. Turn to page 28 to see how much tax this can save. However, the take-home pay of the employee will come down. Invest Rs 1,50,000 and Save Tax upto Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds Top 10 Tax...

BHIM App

What is BHIM? BHIM stands for Bharat Interface for Money , which is an easy way of transferring money from one bank account to an other via a smartphone using the Unified Payments Interface (UPI) platform . It is an instant payments application meant for sending money as well as requesting for payments. How is it different from UPI? BHIM is no different than UPI. But in the case of BHIM, customers don't have to download mobile applications of multiple banks, instead a single BHIM app downloaded from Android Play Store is sufficient. Other than that, payments can be made through a virtual payments ID or through account number and IFS code, same as UPI. What you need to use BHIM? BHIM can be used across an droid smartphones with version 4.0 and above, also it will be made available on iPhones and Windows smartphones very soon. Further, for feature phone users they need to use the USSD feature by dial ing *99#. Why was the need for BHIM felt when UPI is already in place? With various...

Liquidity Adjustment Facility

Liquidity adjustment facility (LAF) is a money market tool used by the central bank of a country (in India it is the Reserve Bank of India ), to infuse funds into the country's banking system when liquidity dries up. Again, in case there is excess liquidity, the central bank uses some tools to help banks manage their surplus liquidity. Usually the RBI uses the repurchase facility (called Repo ) to give short-term loans to banks to meet their temporary liquidity shortage. On the other, hand RBI uses reverse repo facility to help banks park their excess liquidity with it. Banks usually use various securities, which are approved by the RBI, as collateral when they take money from the RBI to meet their short term liquidity requirement     Best Tax Saver Mutual Funds or ELSS Mutual Funds for 2015 1. ICICI Prudential Tax Plan 2. Reliance Tax Saver (ELSS) Fund 3. HDFC TaxSaver 4. DSP BlackRock Tax Saver Fund 5. Religare Tax Plan 6. Franklin India TaxShield 7. Canara...

NRI from Canada and US Invest in Mutual Funds in India

Investing in Indian mutual funds by NRIs from US and Canada As of December 2016, eight Indian fund houses were accepting investments from US/Canada-based NRIs Most of the Indian mutual fund houses have stopped accepting funds from US and Canada based NRIs due to regulatory restrictions. This is because the Foreign Account Tax Compliance Act (FATCA) makes it compulsory for all financial institutions in the world to report comprehensive details of all transactions involving US/Canada residents, (including non-resident Indians) to the US & Canada Government. Top 4 Tax Saver Mutual Funds for 2017 - 2018 Best 4 ELSS Mutual Funds to invest in India for 2017 1. DSP BlackRock Tax Saver Fund 2. Invesco India Tax Plan 3. Tata India Tax Savings Fund 4. BNP Paribas Long Term Equity Fund

Retirement planning from a long-term perspective

Invest In Tax Saving Mutual Funds Online Download Tax Saving Mutual Fund Application Forms Buy Gold Mutual Funds     `HOW green was my valley'. This title comes from a movie I had watched many years ago. A little boy's journey into adulthood and the story of a Welsh valley's turn of-the-century descent from pristine paradise to despoiled coal mining.   I thought of the title because it is comparatively reflective of a person's life ­ the glorious years when he is earning and the sun down years when he is not having his regular job and, hence, his living standards comes down. The reason is a combination of things. Inflation of food items, transport, increase in health related costs in the later years of life and increase in expenses in almost all basic amenities of life. In India, the social security system is almost non-existent. In some states, wherever it is available, the scales of benefits are extremely modest...
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