It is the time to change the stance – for both the RBI and the fixed income investors. With a spike in yields in bond markets after the monetary policy review, experts advise investors to stay away from long term gilt funds and allocate their money to short term bond funds.
“Volatility is expected to continue in bond markets. Hence, one should avoid long-term gilt funds. Given attractive yields one can consider investing in short-term bond funds,” says Abhishek Gupta, Founder and Chief Financial planner of Moat Wealth Advisors.
Maiden monetary policy review in CY2017 by Reserve Bank of India has caught most bond investors off guard. On February 8, yield on 10 year benchmark closed at 6.73 percent – 30 basis points higher than its previous close.
“The RBI has changed gears from third to neutral in one go. This was unexpected and the market was not prepared for this,” says Lakshmi Iyer, CIO (debt) and head of products, Kotak Mutual Fund while explaining the sudden spike in bond yields.
For the uninitiated, a spike in bond yields pulls down the prices, which in turn leads to capital loss for investors. Iyer advises investors to go overweight on short term bond funds.
Short term bond funds are preferred investment bets in volatile times as they are less hit due to spike in yields. The impact of rising yields is more in the long term bonds. The short term bond funds are not only less risky but also have many positive triggers that make them worth a look by fixed income investors.
“Liquidity in the financial market is surplus and it leaves some scope for a fall in short term interest rates,” says Joydeep Sen, an independent financial advisor. As per Budget provision government is expected to buy back bonds worth Rs 75,000 crore in next financial year. Generally, government buys back bonds which are about to mature in a year or two. This should create further demand for the short term bonds, which, in turn, will lift prices of these bonds, Sen adds.
If the short term interest rates fall over next six to nine months as expected by the experts, then the investors in short term bond funds can expect some capital gains in addition to the coupon they are expected to get. Investors are also expected to benefit from the lower expense ratio charged by the short term bond fund as compared with long term gilt funds.
The change of stance in investment advice by most fixed income experts is seen as a complete U turn. Long term gilt funds were the top of the mind recommendation for many distributors. Over the last one year the long term gilt funds as a category registered 13.5 percent returns, whereas short term bond funds as a category offered 9.3 percent returns. However, investors are advised not to expect the past returns to continue over next one year.
“Short-term debt funds focused on corporate bonds with one to four year duration are good investment bets as they can offer better post tax returns if compared with fixed deposits provided one invests with three year time frame,” advises Abhishek Gupta. If you are still worried about volatility, consider investing in ultra short term bond funds or liquid funds.