Opportunity in the Troubled Times

Time to Invest in Debt Funds.

Recently the RBI imposed Liquidity tightening measures to curb Rupee Volatility. The liquidity tightening has resulted into higher bond yields. The shorter term as well as longer term interest rates have spiked up. This provides us an entry point to Invest in Debt Funds.

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The Benchmark 10 year G Sec yield touched an intraday high of 9.47% on 20th August. This resulted in some value buying at those levels and later on intervention by the RBI in the Currency markets resulted in some cooling off. The 10 year Gsec closed at around 8.90% on 20th August.

The RBI also unveiled some new steps on 20th August in the evening :

  • OMO purchases on 23rd August of Rs 8000 crores were announced with an aim to control long term government bond yields.
  • Allow banks to transfer SLR from Available For Sale(AFS) book to HTM book up to 24.5% of their deposit at lower of the cost or value as on July 15, 2013 and spread the losses over a year
  • Indication of calibration of further issuance of Cash Management Bills in order to keep money market rates at around 10.25% p.a.

The above steps aimed at protecting the banking system from adverse price movement in government bonds after 15th July 2013. The Fundamental issue of rupee volatility still seems unaddressed.

Analysts feel that RBI will keep conducting more OMO Bond purchases by buying long term government bonds in order to stabilize the longer end of the curve and at the same time keep short term rates higher in order to check the volatility in the rupee.

The Benchmark 10 year Bond yield is ranging around 8.32% today and rupee is trading at 64.23 despite all the efforts.

What should an Investor Do ??

a. Conservative Investors

We believe Investors should take advantage of the recent spike in money market yields and invest in FMPs (Fixed Maturity Plans). FMP’s of different time horizon like monthly, quarterly, half yearly, yearly, period of – 2 year, 3 year and five years are being launched by various fund houses. The FMPs are also tax efficient and will provide better return than a Bank Fixed deposit.

b. Moderate Investors

Moderate Investors should look at the Short and Medium Term Income Plans where the funds invest in papers ranging from 1.5 to 3 years maturity. The Investment may have some volatility but if the investor is ready to hold till maturity he can have some additional gains as interest rates are bound to soften in 1.5 to 2 years time horizon. The Moderate Investors can also consider investment in Dynamic Bond Funds, wherein the fund manager dynamically manages the duration of the portfolio.

c. Aggressive Investors

The Aggressive Investors should start building their portfolio in long term Income Funds as long term interest rates have less space to move higher as per our view. The investment will be highly volatile looking to the current circumstances but will result into good profits if the investor is patient and understands the risk well.

 

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