Biz_StockZ!

STAY INVESTED IN DEBT FUNDS, SAY EXPERTS!


Fall in bond prices seen as right time to invest in dynamic
schemes
Herd mentality, which has inflicted major losses on investors during times of
unexpected developments,returned to haunt the markets last week. Forgetting the good
returns delivered over the past year, a large number of bond
fund investors, who had started getting jittery since June as the rupee started losing value,suddenly hit the sell button last
week. As a result, many debt funds ended up recording
massive fund outflows.
The cue was Reserve Bank of India’s surprise decision to
increase interest rates on short-term credit with a view to
tightening liquidity and give a leg-up to the sliding rupee.
However, not all’s lost. Industry experts see a window of opportunity in the turmoil that played out in the market last
week. They say the fall in bond prices could provide a good
entry point for investors, who should refrain from panic selling.

RBI’s move
The RBI’s move led to fears that policy rates could move back up
again. This saw the 10-year G-Sec yields spike to 8 per cent, up over 90 basis points from their May lows. This led to a sharp decline in bond prices, since yields and
bond prices move in opposite directions.
Long-term gains
While there was a rush for redemption from bond funds
following the central bank’s move, this knee-jerk reaction
could be unwarranted. Over a
one-year period, most bond funds have returned above 5 per
cent, despite last week’s dip. In fact, funds such as Canara
Robeco Dynamic Fund, IDFC Dynamic Bond Fund and SBI Magnum Income have even
managed double-digit returns over the past year.
The picture, however, turned bleak over the last one month with all funds delivering negative returns, in the range of 1.5 to 6
per cent.
But debt fund managers see a silver lining in this cloud — they think this may be the right time to invest in dynamic bond schemes. Rahul Goswami, CIO-Fixed Income, ICICI Prudential AMC, said, “The time is ripe to
further increase investment allocations into duration funds,
including dynamic bond funds. In the near term, volatility will be there but the opportunity is
great at this point in time. We have always seen that monetary
policy shocks are good periods for investment in debt.”
Concurred Dhruv Chatterji, Senior Analyst at Morningstar: “It would be advisable for existing investors, especially those who
have got in during the last couple of months, not to panic and sell
off in a hurry. Investors, who have a higher risk appetite, can consider this extreme move as a
buying opportunity, and take exposure in debt through a
dynamic bond fund.”
However, investors who cannot digest volatility would be better off putting their money in short-
term and ultra-short-term bond funds now, he added.
Looking forward, fund managers are hopeful of rate cuts and term
the RBI’s present moves as temporary. Santosh Kamath, CIO-
Fixed Income, Franklin Templeton Investments, said: “We remain convinced that lower interest rates are inevitable to alleviate
the macroeconomic situation.
Like in the past, such situations throw up attractive investment
opportunities from a medium-to-long-term perspective.”