Debt Funds: It's still hot

[Kalyan]

Debt Funds: It's still hot

The bond investors have never seen such good times like the last year. But no one knows how long the good times will last. Income funds—those that invest in long-term securities i.e., bonds—have offered solace in times when people are asking for no more than preservation of the capital invested . Most of these funds have delivered more than 20% returns last year.

That's not all—many fund managers say this is just the beginning. With interest rates falling, income funds would continue to perform well. The returns may not be as phenomenal as seen in 2008, but reasonably good enough to tide over difficult times, they suggest.

source : economic times

[Kalyan]

High growth

Many wealthy individuals and professionals managing corporate treasuries agree to that. The corpuses of bond funds of the major fund houses have gone up by at least ten times in last few months. There is a feeling that soft interest rates would be here for a while and this is one thing that bonds love. In fact, the recent developments that triggered better performance of debt funds suggest that the trend would continue.

The reasons that support this argument are simple. Inflation is off its peak, thanks to a fall in prices of crude oil and commodities. Interest rates may fall further—RBI is now more focussed on stimulating economic growth rather than taming inflation. GDP growth that was around 9% last year has fallen to 7.6% in second quarter of the current financial year, according to CSO estimates. Add to this the lull that has engulfed the equity markets which is showing no signs of receding. A money manager has to invest somewhere, right? So, after the fall in stock prices, bonds are his next best bet.

source : economic times

[Kalyan]

Low yield

The yield on the ten-year bondconsidered the Sensex of the bond market—fell to its all time low a couple of weeks back to 4.86%. Since then, though, the yields have risen, many fund managers are confident that yields will breach the recent lows soon. Not impossible, though! But who knows the exact levels? When yields fall, bond prices rise.

Thus, essentially the debate is whether yields would advance up to 4.5% (money to be made) or 4% (lot of money to be made) or whether the best of the rally is behind us (sorry, too late).

"Given the quantum of rate cuts and liquidity injections announced so far, the pace of monetary easing is expected to slow," says Santosh Kamath, CIO - Fixed Income, Franklin Templeton Investments. He says that while the ongoing bond market rally may continue in 2009, the widening fiscal deficit (due to government spending and reduced tax revenues) is likely to weigh on market sentiment. Especially since the bulk of monetary easing now appears to be behind us.

source : economic times

[Kalyan]

What should investors do

So what should investors do? Most fund mangers feel that with interest rates in America nearing zero, global investors would make a beeline for higher yielding securities like Indian bonds. This could lead to a fall in yields, enabling bond funds to post good returns. But it is only a matter of time, before the focus comes back on equities. These have taken the biggest hit as a part of the risk averseness among global investors. Entering now may ensure financial gains.

With stocks falling more than 50%, an investor, who postponed or avoided borrowing for investing in market, should start investing now. A sum in gold and equity with a reasonable amount in bond funds could be the most workable and prudent strategy.

source : economic times

[dhoni]

with the proper bond
we should invest in correct ways