The Reserve Bank of India (RBI) on May 4 raised its repo rates by 40 basis points, thus setting in motion the rising interest rate cycle. With the rise in rates, bond yields also tended to rise, giving bond investors an invariably low return.
As we know bond prices and yields move in the opposite direction. One rises and the other falls.
Though the era of rising interest rates is not considered the ideal time for debt investors, especially long term debt instruments, investors can explore short term debt.
Ultra-short or floating rate
Consequently, experts say that investors can invest in ultra-short debt funds and floating-rate debt funds for now.
For non-starters, ultra-short debt funds invest in Treasury bills of the Government of India, commercial papers issued by corporates and certificates of deposit issued by banks. When interest rates rise, the instruments they held mature and are replaced with instruments with higher returns.
Among ultra-short debt funds, it is advisable to invest in funds that allocate more to safer avenues such as treasury bills and certificates of deposit.
Ankur Kapoor, Managing Director, Plutus Capital advises investors to invest in secured short-term debt. “If you want to park your funds, a floater rate fund or a liquid fund will give you similar returns. However, if you do not have any specific requirement but want to allocate in debt from asset allocation point of view, a secured short-term loan may be preferred,” says Mr. Kapoor.
Sandeep Bagla, CEO, Trust Mutual Fund also echoes the same sentiment when he says, “A short-term fund with a maturity of 1-2 years is an ideal fund to invest in. There are funds with a roll-down strategy that have high yields but low interest rate risk.”
low incentive to invest
One of the major incentives for investing in a rising interest rate cycle is the fact that bond prices tend to decrease with a proportional increase in interest rates.
“It is difficult to invest in a rate rising cycle. As interest rates rise, bond prices tend to decrease. While bonds generate interest income, the return to the investor is lower due to depreciation prices. Lower returns from debt funds discourage investors,” says Bagla.
He also says that most interest rate cycles reverse within a few quarters. “Nowadays most cycles are not very extended and some are reversed in quarters. A simple strategy of investing in rate cycles in select funds would be good for the investor, allowing him to earn rising rates of interest without excessive volatility in fund values. can do.”