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Thursday, November 28, 2013

Time to Invest in Debt Mutual Funds for the Long Term

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Investment advisors believe that it is the right time for investors to get into long-term debt mutual funds — income funds, in other words. They believe that investors can hope to pocket double-digit returns once the rates start falling in the medium to long term.


Long-term interest rates have been heading upwards for a while now. Reflecting the trend, the benchmark 10-year government bond yield has crossed 9% on November 14. Benchmark bond yield at 9% looks a good entry point and investors, historically, have made money after investing at this level. If investors can remain invested for two years, it can be a good investment option. But investors have to be patient and shouldn't expect interest rates to go down quickly.



Financial advisors suggest two strategies for investors. Invest with a two-year horizon, but book your profits when the benchmark bond yield falls to 8%, as and when it happens in the next year.


Income funds deliver best riskadjusted returns when investors enter in these funds when yield is high and get out when it comes down. The benchmark bond yield is frequently quoted in financial markets and it may not be a tough task for most investors to track it regularly.


Investors can expect 13-14% compounded annual growth rate over the next two years from these funds.


Experts have another strategy for savvy investors who keep track of bond markets. The strategy involves betting on liquid funds at the moment and shift to income funds at the right moment. Investors can choose to be in liquid funds and enjoy high accruals for the time being. As yields start moving downwards, they can consider a switch into income funds. Parking your money in liquid funds will help you pocket higher coupon rate prevailing at the moment. As the yields are expected to remain volatile, it will also help in capturing further upmove in yield, if any. After the end of the first quarter of the next year, you can look for early signs of a fall in interest rates such as stabilising inflation numbers, change in stance by the RBI. And that is the time one can consider entry into income funds.


Irrespective of the strategy you adopt, you should be prepared to wait at least for two years for the rates to come down, say experts. Inflation concerns would gradually recede as the result of good harvest starts showing and the high 'base' of inflation being formed now would contribute to lower inflation after a year.


With current account deficit is improving, GDP growth being modest, the RBI does not have much room for interest ratebased fight against inflation. As inflation starts easing, focus would shift to growth management from inflation management.


However, things could get worse before interest rates start their journey downward. Many market observers believe that the inflation may remain around 6% till the end of the current financial year due to unfavourable base in the previous year. This, along with spends associated with elections, should keep inflation and long-term interest rates firm.

Happy Investing!!

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