Simple wisdom from fund managers: Investors can look at value-buying in bond funds to tide over the current crisis.
With the markets oscillating regularly between highs and lows and the rupee testing new depths, investors should allocate a significant part of their investment portfolios to bonds, especially short-term plans, said experts.
Benchmark 10-year government bond yields or g-secs touched a high of 9.48% on August 20, 2013, as the rupee hit a lifetime low of 64.11 against the US dollar. That’s a sign that interest rates are looking up – which is good for depositors and bond investors.
Subsequent intervention in the currency market by the Reserve Bank of India (RBI) and value buying at 9.40-50% resulted in a smart rally in the government securities (g-sec) market, raising bond prices and bringing down the yield. The 10-year government bond yield closed at 8.69% on Friday.
The current yield on the 10-year g-sec is 1 percentage point higher than August 2012.
“Most of the negatives bothering the market are getting corrected. The RBI has already started taking measures to improve sentiments,” said Abhiroop Mukherjee, senior fund manager, fixed income at Motilal Oswal Asset Management Company.
The next moves are expected to hinge on the rupee and RBI’s monetary policy.
“The key to debt markets in the short-term is stability in the rupee and debt FII (foreign institutional investor) inflows,” said Yadnesh Chavan, fund manager, fixed income at Mirae Asset Global Investments.
So, going forward, where do bond yields stand?
“8.55-8.60% from a technical perspective in the near-term,” said Dhawal Dalal, fixed income head, DSP BlackRock Investment Managers. “In the 8.20-8.70% range in the medium-term, said Chavan. But Motilal Oswal’s Mukherjee expects yields to trade lower in the 7.95-8.10% range.
“Investors should take advantage of the recent spike in money market yields and consider investing in 1-year fixed maturity plans or FMPs,” said Dalal.
An FMP is a closed-end scheme that invests in fixed-income securities and holds them till maturity. Higher yields prevalent in the market at the moment help FMPs give attractive returns.
“Recent indicators signal this may be a right time to start nibbling into the bond market, and initiate value buying,” said Mukherjee.