With FD rates declining are bond funds becoming more attractive?
With Reserve Bank of India aggressively wielding the axe on interest rates between February and June, banks and non-banking financial companies (NBFC) have slashed fixed deposit rates. The question is, will bonds funds hold a bigger attraction for investors?
Kolkata: After the RBI rate cut, banks and NBFCs have drawn out their scissors in right earnest to snip fixed deposit interest rates. Fixed deposit rates are all coming down fast. Obviously, in this climate bond funds are expected to become more attractive to the average investor. Let's take a closer look.
According to mutual fund specialists there are hundreds of debt funds and dozens of bond funds in the country. Nilanjan Dey, director, Wishlist Capital and investment strategist for more than two decades tells News9live what sort of investors can find bond funds more attractive in this interest rate climate.
A bit of interest rate risk but less credit risk
"The bonds funds have already become more attractive for the medium term and the short term. Banks have already brought down the fixed deposit rates and by the end of June all rates have come down. This also includes the NBFCs. I expect a lot of traction in bond-based products. Interestingly, there will be a bit of interest rate-based risks but credit risks will be less. Those who will break FDs and switch to managed-portfolios would be looking at products where both the interest risk and credit risk will be under manageable levels," Dey told News9live.
Bonds usually bear two types of risk -- interest rate risk and credit risk. Interest rate risk is a type of risk where bond prices might go down due to rising interest rates. The reason for this is, if interest rates go up and new bonds are issued with higher coupon (interest) rates, existing/older bonds with lower coupon rates turn less attractive and, therefore, suffer a dip in market value. Credit risk in bonds refers to a risk that is internal to the bond issuing company. It is a risk that refers to the possibility that the company could fail to make timely interest payments or even repay the principal amount when the bond matures.
Investors with short time horizon may not benefit
"I am expecting new investments in the debt products and bond funds will be an element of that. But I am not very sure as to what purpose bond funds will serve those who invest in fixed deposits for a short tenure. If you are looking for an FD of six months, I don't think bond funds with such an investment horizon will be of much use. But if the horizon of investment is a bit longer, bond funds are a clear option," Dey told News9live.
Fund returns
According to a report, DSP Credit Risk Fund delivered a return of 19.1% over the last two years. In the second position is HSBC Credit Risk Fund which generated 13.7% and in the third position is Aditya Birla SL Credit Risk Fund that provided 11.9% return. The funds in this list were Aditya Birla SL Medium Term Plan with 10.4%, Invesco India Credit Risk Fund with 9.3% and 360 ONE Dynamic Bond Fund with 9.1% returns.
(Disclaimer: This article is only meant to provide information. News9 does not recommend buying or selling shares or subscriptions of any IPO, Mutual Funds, precious metals, commodity, any form of alternative investment instruments and crypto assets.)