Now, for an investor, this may seem like a ‘non-event’ as it may simply mean nothing changes. But a ‘no action’ in this instance, can cause some action on some of your debt funds, as you may have observed post May 22.
Here’s how a pause on policy rate cuts matter to you and what should be your stance.
Delay in rally
The renewed rally in gilts (government securities) and long-term bonds in recent times (at least until May 22) was a result of few events or expected events: one, there was robust FII activity; two, the RBI had resorted to rate cuts and there were enough indications of more in the offing. Three, open market operations done by RBI was infusing liquidity thus easing yields.
But post May 22, the fall in the rupee by close to 7% reversed some of these events or the expectations. One, FII interest fell with outflows seen in the debt market. Two, the RBI had to pause to take stock of the evolving currency situation locally and globally. The RBI cannot, at this juncture, afford to cut interest rates simply because a rate cut will infuse more rupee liquidity and make the rupee cheaper against the dollar, thus worsening the rupee’s slide.
So for you, as an investor, a pause in the rate cut means no immediate rally in your gilt funds or long-term bond funds (those with a high portfolio maturity of say 8-10 years). In fact, you could well continue to see the kind of volatility (where NAV dropped anywhere between 0.01% and 1%) you saw in the past fortnight in these instruments.
Rate cuts remain due
But relax, if you have a more than one-year view, you will have little to worry and here’s why: For one, the RBI has hinted its bias towards rate cuts as it remains concerned about the poor GDP growth as well as industrial production numbers. The RBI has stated that its monetary policy will continue to address growth issues, provided inflation recedes in a sustained manner.
Now the silver lining is that inflation has indeed been on a downward trajectory barring food inflation. Food inflation accounts for close a fourth of headline inflation and would therefore be a key component to help keep inflation at bay. With a strong monsoon promised, better forecasts on this front is likely to provide some confidence to the RBI.
Hence, the 50-basis point rate cut forecasted by economists for this year will likely happen, although with delay and at a more gradual pace.
If you hold debt funds or intend to buy into debt funds you could consider one of the following strategies that fit you:
Time frame of less than one year
If you are holding long-term gilts funds or bonds and your goal is nearing within the next few months, then you would be safer moving to ultra-short term or liquid funds to avoid volatility in the former over the next 2-3 months.
If you are investing afresh with a less than 1-year time frame, then gilts and bonds can be risky. Use ultra short-term funds (6-9 months) or short-term debt funds (1 year). The short-end of the curve should provide decent returns with less volatility as short-term liquidity requirement will continue as companies with unhedged foreign currency liabilities will require funding (given the rupee fall).
Time frame of more than one year
If you are already holding medium to long-term bonds with a time frame of 1-3 years or more, then this short-term volatility should not cause panic. While rate cuts may be delayed, they need to happen for the economy to accelerate. Any selling now would amount to selling cheap as discussed in our earlier article – To be or not to be in the market.
But as a general rule, avoid excessive exposure to gilt funds as these are only tactical investment avenues.
If you wish to invest afresh, go for medium to long-term income funds which will have a good mixture of both government securities as well as corporate bonds, rather than pure gilt funds.
Our call on ‘Funds for risk-taking debt investors’ given in end May remains the same. But please note that these funds are not suitable for long-term investors with medium risk appetite.
We would recommend that such investors pick from our Select Funds list – ‘Debt long term’ category.
New investor
If you are a new investor in the markets and have a long-term view, then you should necessarily have equities in your portfolio now. Besides the fact that equity valuations are trading below India’s long-term averages, the best time to invest in equities is when the worst of the news is out.
We have seen dip in earnings growth and economic growth, fall in the rupee and also an inflation peak out. Hence, if you do not have any exposure to equities, then kick-start an SIP with a balanced fund or MIP to get a dose of equities or simply use FundsIndia’s Shubh Aarambh portfolio.
Wealth Conversations – April 2024- Temporary suspension of subscriptions in ” Mirae Asset Global Electric & Autonomous Vehicles ETFs Fund of Fund & Mirae Asset Global X Artificial Intelligence & Technology ETF Fund of Fund
- Merger Announcement: Aditya Birla Sun Life CRISIL IBX AAA Mar 2024 Index Fund
Here is everything that you need to know about Arbitrage Funds- Temporary suspension of subscriptions in “DSP US Treasury Fund of Fund”
Thanks a ton Vidya,
Crisp and a wonderful artcile, more than this a Timely one.
These days i eagerly wait for your articles on Funds India Blog (Marketplace – FundsIndia).
They are not only useful but very relevant to present market condtions… they are simply like a running commentary on what is happening.
Hello Sunil,
Thanks.
Vidya
Thanks a ton Vidya,
Crisp and a wonderful artcile, more than this a Timely one.
These days i eagerly wait for your articles on Funds India Blog (Marketplace – FundsIndia).
They are not only useful but very relevant to present market condtions… they are simply like a running commentary on what is happening.
Hello Sunil,
Thanks.
Vidya
Hello Vidya , As usual great article , I have been following you since your ‘Hindu’ days and fully agree with Sunil.
I am a FundsIndia invester. I was tracking the performance of IDFC Dynamic bond fund and I had some spare funds which I wanted to park in a debt fund for about 12 months Plus period , so invested about Rs 2000 K in the second week of May 2013 in this fund ( Dividend option ). I realised post May 22nd the value of my investment has gone below my invested amount. What is your advise , I should leave my investments there or move it to another fund , more stable. The fund has an exit load for 90 days so I dont want to move till August 15th anyway.
Thanks,
Vivian
Hello Vivian,
Thanks!
What was the original time frame with which you invested in IDFC Dynamic Bond? If you intended to hold it as a long-term investment for say 2-3 years, then you should just hold it and not be bothered about the minor fall. IDFC Dynamic Bond has a less aggressive portfolio maturity of about 5.7 years and as such, is better placed to face the volatility compared with more aggressive funds such as SBI or UTI Dynamic Bond.
In fact, it has fallen much lesser than these other funds in recent weeks. But if you had originally put your money with a short-term view, then yes, there could be some volatility. In fact, if you had a short-term time frame of less than 18 months, then your choice should not be an income fund or dynamic bond fund. It should be either ultra short-term of short-term funds.
My suggestion is that, if you have no pressing need for this money, let it lie for at least a year (2-3 year is ideal for such funds). If you cannot do without it and have a goal for this money in the near term, then you should probably shift to liquid funds. Thanks.
Thanks Vidya , Understood. I will stay invested as i may not need the finds in next two years. Thanks for your advise.
Hello Vidya , As usual great article , I have been following you since your ‘Hindu’ days and fully agree with Sunil.
I am a FundsIndia invester. I was tracking the performance of IDFC Dynamic bond fund and I had some spare funds which I wanted to park in a debt fund for about 12 months Plus period , so invested about Rs 2000 K in the second week of May 2013 in this fund ( Dividend option ). I realised post May 22nd the value of my investment has gone below my invested amount. What is your advise , I should leave my investments there or move it to another fund , more stable. The fund has an exit load for 90 days so I dont want to move till August 15th anyway.
Thanks,
Vivian
Hello Vivian,
Thanks!
What was the original time frame with which you invested in IDFC Dynamic Bond? If you intended to hold it as a long-term investment for say 2-3 years, then you should just hold it and not be bothered about the minor fall. IDFC Dynamic Bond has a less aggressive portfolio maturity of about 5.7 years and as such, is better placed to face the volatility compared with more aggressive funds such as SBI or UTI Dynamic Bond.
In fact, it has fallen much lesser than these other funds in recent weeks. But if you had originally put your money with a short-term view, then yes, there could be some volatility. In fact, if you had a short-term time frame of less than 18 months, then your choice should not be an income fund or dynamic bond fund. It should be either ultra short-term of short-term funds.
My suggestion is that, if you have no pressing need for this money, let it lie for at least a year (2-3 year is ideal for such funds). If you cannot do without it and have a goal for this money in the near term, then you should probably shift to liquid funds. Thanks.
Thanks Vidya , Understood. I will stay invested as i may not need the finds in next two years. Thanks for your advise.
Hi Vidya,
Currently i am holding a Mix of Gilt (Good exposure and MTM return of 14%+) , Dynamic Bond, little bit of Income and Short term/Liquid funds. I do have a million spare to invest in debt and equity.Looking at the current scenerio could you please advise what percentage should i invest in Income, Dynamic and STF.I dont have a fixed investment horizon but don’t want it be skewed at either side, say diversified horizon (from less than 1 year to 3 years).
Hello Vishal, You have plenty of funds in your portfolio. We would have to first see if you can invest some in existing funds and not add too many funds afresh and result in duplication. This will call for a review and suggestion. I request you to kindly route your current query through the ‘Ask Advisor’ feature in your FundsIndia account (click help tab). This way our advisors can track and respond to your query. We can refrain from discussing your portfolio on a public blog.
Thanks, Vidya
p.s we will definitely require a rough time frame for your investment in debt and investment in equity. For a 1-2 year time frame, for instance, we cannot suggest equities. hence we need to know this information.
Hi Vidya,
Currently i am holding a Mix of Gilt (Good exposure and MTM return of 14%+) , Dynamic Bond, little bit of Income and Short term/Liquid funds. I do have a million spare to invest in debt and equity.Looking at the current scenerio could you please advise what percentage should i invest in Income, Dynamic and STF.I dont have a fixed investment horizon but don’t want it be skewed at either side, say diversified horizon (from less than 1 year to 3 years).
Hello Vishal, You have plenty of funds in your portfolio. We would have to first see if you can invest some in existing funds and not add too many funds afresh and result in duplication. This will call for a review and suggestion. I request you to kindly route your current query through the ‘Ask Advisor’ feature in your FundsIndia account (click help tab). This way our advisors can track and respond to your query. We can refrain from discussing your portfolio on a public blog.
Thanks, Vidya
p.s we will definitely require a rough time frame for your investment in debt and investment in equity. For a 1-2 year time frame, for instance, we cannot suggest equities. hence we need to know this information.
Thanks for your advise…
Thanks for your advise…
hello vidya,
i have been investing lump sum amount in birla sun life dynamic bond fund from november 2011 and my current investment is 50000 and it is up by 13%. should i hold this fund or should i book profit. i can hold this fund more a year only.
one more advise is that recently i invested in sbi magnum income fund. it is down by 2% from the time i invested 50000 rupee. i can hold this fund for 2 years. should i continue to hold or book los?
would be great if you can reply me.
Hello Viral,
If you have only 1 more year of holding time frame for Birla Dynamic Bond, then book some profits. But ensure you sell units held for over a year to avoid short-term capital gains.
SBI Magnum Income is a mediocre performer although it picked pace in recent years simply because it took exposure to a long maturity portfolio. But that also means high risk. The fall, of course, is a broad debt market phenomenon (esp. for funds that held long maturities) and has nothing to do with the fund performance as such now.
If you can hold for 2-3 years, you can watch for performance.
Ideally, for your time frame, I would think with funds such as Birla Dynamic, Templeton India Income Opportunities or IDFC SSI Medium Term.
In future, request you kindly route your fund-specific or portfolio-specific queries through the ‘Ask Advisor’ feature available in your account (when you click the help tab). We prefer to track and respond to queries through this mode to help serve you better. Thanks, Vidya
thank you for your valuable advise. i am will use the facility ‘ask adviser’ facility in near term.
hello vidya,
i have been investing lump sum amount in birla sun life dynamic bond fund from november 2011 and my current investment is 50000 and it is up by 13%. should i hold this fund or should i book profit. i can hold this fund more a year only.
one more advise is that recently i invested in sbi magnum income fund. it is down by 2% from the time i invested 50000 rupee. i can hold this fund for 2 years. should i continue to hold or book los?
would be great if you can reply me.
Hello Viral,
If you have only 1 more year of holding time frame for Birla Dynamic Bond, then book some profits. But ensure you sell units held for over a year to avoid short-term capital gains.
SBI Magnum Income is a mediocre performer although it picked pace in recent years simply because it took exposure to a long maturity portfolio. But that also means high risk. The fall, of course, is a broad debt market phenomenon (esp. for funds that held long maturities) and has nothing to do with the fund performance as such now.
If you can hold for 2-3 years, you can watch for performance.
Ideally, for your time frame, I would think with funds such as Birla Dynamic, Templeton India Income Opportunities or IDFC SSI Medium Term.
In future, request you kindly route your fund-specific or portfolio-specific queries through the ‘Ask Advisor’ feature available in your account (when you click the help tab). We prefer to track and respond to queries through this mode to help serve you better. Thanks, Vidya
thank you for your valuable advise. i am will use the facility ‘ask adviser’ facility in near term.