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.”


(This article was published on July 21, 2013)
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