The creation of new mutual funds follows what can be called financial (or business) fashions. Over the last decade, we’ve seen specialty equity funds in momentarily hot sectors like infrastructure; we’ve seen all kinds of hyper-specialised international equity funds, and all manner of gold funds. Of course, none of them have delivered what plain-vanilla diversified equity funds have, but that’s a lesson lost on the inventors as well as consumers of ideas.
However, two interesting new funds have recently extended this inventiveness to an entirely new area—that of fixed income funds. Axis Mutual Fund and Motilal Oswal Mutual Fund have each introduced a fund that seeks to passively replicate the returns of ten-year government bonds. There are many things that are new about these funds.
The ‘fashion’ point of these funds is the enormous attention being paid over the last year to the direction given to interest rates by the Reserve Bank.
There’s a general anticipation that interest rates will now turn decisively downwards and when that happens, the market price of long-term government bonds will rise, leading to substantial gains for those who have invested in such bonds. Individual investors don’t normally have access to government bonds for a host of reasons, not the least of which is that the ticket size is R5 crore.
These funds effectively give access to government bonds to individual investors with anything down to a few thousand rupees to invest.
However, that’s where the good news ends. At the end of the day, these funds are professional products that are of use only to those who have the understanding to take a call on interest rate movements.
Rates may well be headed down but there’s a lot more than that to bond investing. Investors who need bond funds would probably be better-served by having a fund manager make investment decisions rather than just follow one narrow product.