The year have been mixed bag for mutual fund investors .While equity fund investors have been having a harrowing time as the stock market plunged by 28 percent ,the rising interest rate scenario has been good for investors of dept fund like liquid funds ,ultra short term dept funds and fixed maturity plans (EMPs) . However, the RBI pause of rate hikes after 13 rates hikes in a row is likely to change the scenario .With inflation beginning to moderate, further rate hikes may not be warranted. In fact clearly realizing the risk to growth, the RBI has indicated a likely reversal in the cycle. If this materializes, the emerging interest rate scenario would warrant a few changes in the portfolio composition for dept fund investors .Here is how some of the dept fund categories are like to perform going forward.
Fixed Maturity Plans (FMPs)
With bound yield closer their peaks, FMPs remain an attractive investment option currently, as, investors can lock in their money for various fixed maturities ranging from three months to three years. FMPs aim to generate predictable returns and at the same time, protect investors from interest rate volatility. While structurally, FMPs may be similar to fixed deposits ,the tax efficiency of these schemes makes them a much better option .However ,one must be quite sure about the time horizon ,as the liquidity provided by these plans through listing on the stock exchange is not very efficient ,both in term of the liquidity itself as well as the pricing.
Ultra Short-Term Dept Funds
The investment objective of these schemes is not to generate reasonable returns and liquidity, primarily through investment in the money market and short term debt instruments .Although these are potentially better than the liquid funds the longer maturity of up to one year or so can result in slight volatility .If interest rates fall, the returns from these funs too will fall.
Key Points
1. The rising interest rate scenario has been good for investors of dept funds like liquid funds, ultra short-term dept funds and fixed maturity plans
2. While structurally FMPs may be similar to fixed deposits, the tax efficiency of these schemes makes them a much better option
3. If the interest rates fall, the returns from ultra short term dept funds too will fall.
Short-Term Debt Funds
Short-Term funds predominantly invest in dept instruments with one two year maturity. These are potentially better than ultra short –term funds, but can be more volatile, as the mark to market component in the portfolio is higher. However ,when compared to medium term dept funds and gilt funds ,short term dept funds experience lower interest rate volatility but offer attractive returns in a falling interest rate scenario. Therefore investors with a time horizon of 6-12 months can invest in these funds and reap the benefits when the RBI begins to cut the rates.
Debt/ Income Funds
Income funds invest primarily in dept and money market with the twin objectives of optimum returns and liquidity for meeting investros medium terms needs .These funds strive to earn study return by actively managing their portfolios on interest rate movments and cridet risks.Since there is an inverse realtionship between the interest ratres and bond prices,thease funds benifit from capital gains on bond in a falling interest rate scenario .However there is also the risk of bond market rally mot materialising in the manner being envisaged currently ,due to higher government borrowings and a depreciacting rupee.There for it will not be prudent for risk averse investors to invest in these funds just because everyone is taking about this emerging opportunity .Besides investors must have a time horizen of 18-24 month for investing in these funds .
Gilt Funds
Gilt fund also provide a great opprtunity to investors to benefit from rate cuts.Gilt securities are interst bearingf instruments issued by the government as a part of its borrowing programme .While gilt funds are ideally suited for those who are looking for saftly as government securities carry zero default risk and are highly liquid,the downside is that the prices of government securities fluctuate sharplydue to higher sensitivity towards the interset rate moment.As a result ,gilt funds can be very volatile in the short- term.
Amazing article.
ReplyDelete