INSUBCONTINENT EXCLUSIVE:
By Ankur Maheshwari Over the last one year, many investors have experienced negative to marginal positive returns on their fixed income
This has come as a not-so-pleasant surprise and they are wondering on how to manage the debt holdings going forward
rising inflationary pressures by highlighting following risks: a) Increase in crude oil prices having direct implications for domestic
inflation, b) Uncertainty surrounding increase in Minimum Support Price, c) Staggered impact of HRA increases by various state governments,
d) Uptick in domestic growth momentum leading to demand side pressures and e) Uncertainty and volatility in the global financial markets
With reference to inflation projections, RBI expects headline inflation at 4.6% for Q2:2018-19; 4.8% in H2 and 5.0% in Q1:2019-20
commentary from RBI, economists are divided on possibility of another rate hike
However, there are also economist who believe the rates hike have been front-loaded and see no more rate hike at least for the financial
Structural shift of interest rate cycleIrrespective whether RBI opts for another rate hike or prolonged pause, investors need to
re-evaluate their fixed income holdings in light of an upward biased yield curve
It appears that we are currently in a midst of a structurally rising interest rate regime
Having a magnified view of 10-Year government bond performance from Jan 2017 till YTD 2018 highlights the upward movement in rates.
In
addition to 10-year G-sec yields, 1 year performance of select CRISIL benchmark indices highlights the adverse impact of increasing 10-year
holding short duration bonds.
A slightly longer view of the benchmark 10-year government bond yield movement overlaid with RBI policy rates
clearly demonstrates that their movements have been largely in sync over many rate hike/cut cycles.
What should be the investment
strategyWhen interest rates are expected to rise, bond prices tend to fall (inverse), resulting in fall in the NAVs of bond funds
Long duration bonds/funds are relatively more price sensitive than short duration bonds/funds to interest rate changes and may see price a
steeper price correction in an increasing interest rate scenario
Hence, it is important for investors to prefer low duration and ultra-short term bonds over long duration funds
This strategy will minimize interest rate risk and volatility.
Incase investors are not at all comfortable with any intermittent volatility
and prefer locking in yields, we recommend investing in FMPs and interval Plans in a phased manner
However, it is important to note that these are held to maturity instruments and may not provide any liquidity during the holding period
Also, it is important to note that, while aim is to maximize the yield of the portfolio, investors do take good care on the credit quality
that the portfolio brings
Many a times, a marginal improvement in the yield of the portfolios may not be worth for taking undue credit quality risk it entails.
(Ankur
Maheshwari is CEO of Equirus Wealth Management
