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Friday, August 30, 2013

Short-term Funds Better Investment Option now

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Bond market has gained volatility as the central bank and govt attempt to prop up a flagging rupee, resulting in losses for investors in debt funds


Now debt investors have started closely following the bond market. The government and the Reserve Bank of India's efforts to prop up the rupee has made the bond market extremely volatile. The benchmark 10-year 7.16% 2023 security moved up from 7.50% to 8.88% last month, leading to losses for investors in some debt funds. According to Value Research, an independent mutual fund tracking firm, short-term debt fund category is down 0.25% and income funds category is down 1.52% during the same period.


With the central bank's primary aim is to stabilise a falling rupee, the tightening measures are likely to continue for some time. This means interest rates in the near term are likely to remain high. Investors should invest in short-term bond funds.


Short-term funds generally have a portfolio consisting of certificate of deposits, commercial paper and bonds with less than one year-tomaturity.


As the investments are short term in nature, the portfolio does not carry high interest rate risk. Fund managers also invest in highlyrated securities.


Experts believe the poor performance of some debt funds may continue as there is no clarity on rupee yet. The rupee fell to an all-time low of 62.03 against the dollar on Friday.


In the near term, there is no clarity on where the rupee will stabilise. In such a scenario, tightening by the RBI is likely to continue, which will keep interest rates high.


Among the steps announced last week, the RBI reduced the limit for remittances made by resident individuals from $200,000 to $75,000 per financial year, disallowed use of liberalised remittance
scheme to buy property outside India and has reduced limit for overseas direct investment (ODI) under automatic route for all fresh ODI transactions.


These measures, along with the tightening measures taken in July, led to a sharp rise in short-term rates. Shortterm funds offer a yield-tomaturity (YTM) of anywhere between 10.25% and 10.50%%, giving investors a good entry opportunity.

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