Friday, July 19, 2013
FALL IN BOND FUNDS NAV......AN OPPORTUNITY?
The Lay Investor will be shell shocked for sure.
First his favourite, “Can never fall” Gold fell by 15% and next
his “Can never ever fall” Bond/Liquid Funds Fell by a massive 4% in a single day.
His definition of “safe” investment would have gone for a toss.!
We all now know why Gold fell. (Read http://goodfundsadvisor.blogspot.in/2013/05/do-not-buy-gold-this-akshaya-tritiya.html)
What should you do if you have a investment in Liquid/Bond fund?
WHY BONDS FELL?
The Reserve Bank of India (RBI) in its effort to rein in Dollar decided to tighten Domestic Liquidity and restricted overnight finance to banks as well as sell bonds in a bid to restrict liquidity in the system, a move that would take pressure off a weak rupee. This pushed up interest rates in the domestic money market.
This sudden jolt shook the Banks and they rushed to redeem their investments from Mutual Funds, especially Liquid and Gilt Funds. This resulted in Bond Yields shooting up to above 8% from 7.5%, the single biggest day gain in more than 3 years.
As Bond prices are inversely related to Interest Rates, a Rise in Bond yields pushes the NAV of Bond Funds down and hence, NAV followed suit with a fall of more than 2%. Even liquid funds were not spared and it was a “shocker” for many investors to see the supposedly “safe, very safe” Liquid funds too posting negative returns.
WHAT COULD HAPPEN NOW:
RBI could manage to sell only about Rs.2500 crore worth of bonds out of its targeted Rs.12000 but surprisingly it rejected most of the bids. Thus, RBI has sent a strong signal that these measures were temporary by rejecting bids and RBI is not in favour of strong interest rates.
The Liquidity pressure on Mutual Funds is ignorable as can seen from the fact that Mutual Funds were yet to make use of the Special Liquidity Window opened by RBI as they were eyeing higher yields which clearly shows that they have enough liquidity to manage redemption pressure.
WHAT EXPERTS SAY:
The Most experienced Fund Manager in the Industry on the Fixed Income side, Mr.Amandeep Chopra of UTI assures Investors “no need to panic, stay invested as this is a short term reaction”. In fact, he further goes on to encourage new investors to jump in these funds as these RBI measures are expected to be reversed sooner rather than later”.
IDFC Mutual Fund says that “Bond funds have become much more attractive due to this short term disruption”
TATA Mutual Fund has recommended investment in Dynamic Bond Funds at current levels with a 1 year Investment horizon as the Fund House feels that Investors like PF, Insurance Cos will use this opportunity to enter bond funds and thus ease yields on Bonds.
Kotak Mutual Fund feels that the sharp drop in the NAV of liquid and Bond funds is temporary and the drop provides lucrative investment opportunity for investors across the curve.
WHAT TO DO NOW:
If you have invested in these funds with a horizon of another year to go, you have nothing to worry as interest will accrue to the Funds holding and the NAV would rise. Moreover, the interest rates are expected to fall, at least Not Go Up, and in worst case scenario for an investor, the rates could be stable. So your money is safe.
Continue to hold and those who would mind a bit of volatility, entering the Bond Funds should give you Double Digit returns, especially after the NAVs have dropped due to “Mark to Market” impact.
In the year 2008, Bond and Gild Funds generated returns of above 20% and next year gave a negative return of -15%, so you need to be very quick to get in and get out of these funds.
Best option would be to invest in Dynamic Bond Funds where the Fund Manager will take the call of moving in and moving out of short term and long term Debts.
The decline in NAV of BOND Funds during current week was a GOD GIFTED Opportunity for those Investors who wanted to Invest in such Funds & had some spare money.
Going forward, the investors can benefit from steady accruals from these funds and also benefit from rate cuts, when they happen.
I would recommend Short Term Debt Fund and Dynamic bond, especially those with lower duration.
Low risk investors should look at Accrual funds.
Enjoy the ride but be warned the ride could be bumpy.
Have you read the best seller DON'T RETIRE RICH ?
- Asset Allocation
- Balanced Funds
- Best Fund to Invest
- Financial Planning
- Fund Call
- Gold ETFs
- Investment Advise
- Liquid Funds
- MF Lessons
- Mutual Fund Advise
- Small Caps
- Star performers
- Tax Planning
- Wealthy Habits