As rates of interest are rising, ought to I put money into liquid funds for the quick time period with out taking a long run publicity in any funds?
— Piyush Sharma
Bond costs are inversely associated to rates of interest, i.e. as rates of interest rise, bond costs fall and vice versa. Additionally, greater the period of a bond, the higher is the mark-to-market loss throughout rising rates of interest and vice-versa. Recently, the rate of interest cycle turned a nook and is now on the upswing. The sovereign yield curve has seen an upward shift and has additionally flattened considerably following a sharper rise in yields on the shorter finish amid measures by the RBI comparable to repo fee hike, CRR improve, decreasing of systemic liquidity, and so on., in response to issues over inflation and financial tightening by international central banks.
Longer period funds witness a better fall in worth than shorter period funds for a similar rise in rates of interest. Hence, buyers usually are likely to gravitate in the direction of decrease period portfolios after they anticipate charges to rise. However, market-to-market loss is dependent upon the quantum of fee improve and the period of the bond portfolio. Hence, expectations of the quantum of rise in rates of interest at varied segments throughout the yield curve play a key function in taking positions from a period perspective. As we’ve very just lately witnessed, the rise in charges on the shorter finish (1-2 years) has been a lot sharper than that on the longer-end (over seven years) of the yield curve.
In case of very quick period funds comparable to liquid funds, a portion of the portfolio will get matured periodically which then gives money to re-invest on the then greater charges given the rising fee situation. Hence, these funds profit as their accrual fee is considerably aligned to the rise in rates of interest on the shorter finish of the curve. Cash wanted for near-term bills is usually parked into liquid and ultra-short-term funds. One must also be cognizant of the risk-reward on supply throughout positions on the yield curve and be adequately diversified at varied segments in step with their risk-appetite. Currently, the medium finish of the curve seems engaging from a risk-reward perspective, providing engaging yield pick-up (~2.5%) relative to the very quick finish.
(The author is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to [email protected])