Bond market – survival


The bond street is unanimous that interest rates are set to climb northwards. Most market participants have discounted a hike of 25 basis points in repo rate by the Reserve bank of India (RBI) in its policy review.

Globally also the scene is not different. Japan abandoned its zero interest rate policy and hike its key rate by 25 basis points. The US Fed Reserve is also expected to hike its rate in August. That could be bad news for debt fund investors because of the inverse relationship between price and yields.

The best way to tide over the situation is to take a cue from fund houses. If you look at new products from mutual funds, you will find that most of them are fixed maturity plans (FMP). They are a good option for investors as they allow you to lock-in your investments.

A cursory look at the Securities and Exchange Board of India (Sebi) would reveal that mutual fund houses have lined up a large number of FMP.

For the financial neophytes, fixed maturity plans or FMP are close-ended mutual fund schemes with a fixed maturity of, say, three, six, or 12 months. They are more like fixed deposits with a slightly better return. Since it is a close-ended scheme the fund manager will try to match the maturity of the portfolio with the scheme. This will ensure that the scheme is untouched by a change in the interest rate scenario. Since the scheme provides the benchmark return long with fund managing expenses, is easy to find out the likely return before investing in the scheme.

Another option before investors, say financial advisors, is to park their money on liquid funds to tide over the uncertainty. Liquid funds are ideal for investors, who don’t want to take the risk of parking their money in long term debt due to uncertainty about rates. Liquid funds are suited to the investor if he considers an investment horizon of a day to a month.

Liquid funds are ideal, but even otherwise most of the funds are taking a short-term view these days. This will ensure that you won’t be hit badly in a rising interest rate scenario.

Some market players also suggest floating rate funds to tide over the situation. Since floating rate funds invest in instruments with coupons linked to a benchmark rate, any change in rates would reflect on the coupon, says a financial advisor. According to him, if you are looking for a long term investment option, the floating rate scheme is ideal.

Another expert’s opinion is not in favor of floating rate schemes. The reason is since the coupon rate is reset only after a certain period of, say three months, sometimes there will be a delay. There can be a time lag before the new rate hike reflects in the investments.


· With interest rates being raised globally analysts say the best way to tide over the situation is to invest in fixed maturity plans.
· Another option according to financial advisors is to park their money in liquid funds to tide over uncertainty.
· Some market players also suggest floating rate funds since they are linked with coupons linked to a benchmark rte. A change in rates would reflect on the coupon.