How to make money from bond yields in the current situation?
When we talk about investing in financial asset classes, we are talking about equities and fixed income. To this extent, fixed income is undervalued because it’s not that fancy when it comes to returns. If planned properly, depending on one’s risk appetite and, more importantly, the type of lifespan, one can plan investments for as little as 30 days or 300 days or 3,000 days. That’s the beauty of fixed income, especially in today’s market scenario, where rates have gone up from the period we were 6-8-12 months ago.
It’s important that viewers take this into account and allocate it to regular income, not to add to their money. Most importantly, more stability in a financial portfolio.
Do you think the rate hikes by the RBI and the central government have been factored into the bigger bond yields? Should I wait to find more price increases, or if it is decided that today is the time to move on?
The first part of what you said is absolutely correct, most of the rate hikes that have happened have been in price, and a lot of what could have happened has been in bond yields or bond prices. So what are you waiting for? There will be fluctuations. Investors should keep this in mind, be it stocks, fixed income, gold or real estate, every investment will have volatility, but to get rid of that volatility, invest in installments. Even fixed income can do this. We’re far from a bottom in rates, but have we peaked in rates? The answer may be no.
So while one is in that sweet twilight, one can stagger investments over the next three to six months in order to be able to benefit from high returns on the portfolio.
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What bond-related financial instruments are we talking about?
Then a whole range of financial instruments are available. There are bonds issued by the Indian government, there are bonds issued by state governments, and of course corporate bonds issued by Indian public and private sector entities.
At the current juncture, given the absolute yield level and relative yield level, considering the pricing of each bond, we think there is a good chance for investors to focus on central and national sovereign bonds, because it is not a good opportunity to participate in corporate bonds, But the gap, or yield spread—what we call the spread between government bonds and corporate bonds—has all but collapsed. So on a risk-reward basis, we think sovereign investing today is a better, superior investment opportunity, and we like anything from three to six years in terms of tenure or tenure. So if you want to buy 2025-26 or 2028-28 or funds with that maturity, go for it.
What kind of benefit have we seen from these bonds during this term?
Currently, if you look at the funds of the senior portfolio, the maturity is about two to three years, which means the average maturity is closer to four years. From a mutual fund perspective, the portfolio yields close to 6.9-7%, largely reflective of the market.
Of course, the vagaries of interest rates can work to your advantage, but this is the prevailing rate. India’s benchmark government bond maturity is currently around 7.15%.
Would this be a good option for seniors to invest in bonds?
Seniors who need regular cash flow can also look into this category. Seniors with less risk appetite should look to debt-blended funds. Debt hybrid funds are primarily fixed income, but they have a small tail-end equity component, which is why they are called debt hybrids. One can look at long-term bonds that are five-year, seven-year, ten-year in nature, or you can look at a combination of these debt-hybrid funds to add a little bit of potential return over three to five years.
Can you explain to us dynamic bond funds and how they work?
Dynamic bond funds are all about being positive, positive, positive. If you think the market is going to be volatile, you’re going to have a hard time keeping an accurate amount, which is true in most cases. A dynamically or actively managed fund seems to be a place to actually put money in and keep it for two, three, four or five years.
Here, the fund manager or portfolio manager moderates or adjusts the duration of the portfolio based on his or her view of the interest rate y. If you think things look good and you can actually buy more bonds with longer maturities, you can increase the duration of your portfolio. One can also reverse and shorten the duration of a portfolio when one thinks the world is coming to an end and interest rates will move north. By doing so, the portfolio manager is actually increasing or decreasing the investor’s interest rate risk.
Some of them also choose to do it with credit, but in general I give you most of them, in general, it’s for interest rate risk management.
So be sure to look at actively managed funds. In our experience, actively managed bond funds or dynamic bond funds have the potential to outperform passive or benchmark funds, typically during cycles.
What global triggers will affect the debt portion of a portfolio?
Every global trigger that affects financial markets must also affect fixed income. So first, if there is massive inflation, as we’ve seen in the West, the tendency of those central bankers — whether it’s the US or the ECB — is to raise rates faster. Now that’s also a very strong headwind for domestic bond yields, so that’s the number one factor.
The second is commodity prices, especially crude oil and to some extent gold, because those are our two main imports. As these prices go up, you don’t burn more gold, but for crude oil, we don’t know the price. So we keep buying more when prices are low and high. These commodity prices are trending globally because we are price takers rather than price setters.
Finally, there are geopolitical issues. Whatever happens globally, if there is a disruption in any of them, be it commodities or any supply chain, all of these are mixed together to provide some kind of direction or anchor on top of domestic factors.
Sometimes domestic factors dominate compared to offshore and vice versa, so the degree may vary, but they certainly affect bond yields as well.
Let’s talk about some myths that should be busted when investing in bonds. A lot of people think that fixed income usually doesn’t provide growth opportunities, is this true?
As I said before, if you’re looking for a growth route, you have to try to get the rate cycle right at the right timing, which means you try to get into the peak of the rate cycle and then try to get through it where rates ease; then there is a potential opportunity.
On a consistent basis, if you’re talking about a compounding effect on your money, it’s a bit too demanding for fixed income to have that effect. Given that we already have steady-state inflation of 5-6% in our system, the tendency to pull rates down beyond a certain threshold will be very limited.
So in order to give some stability to the return profile of your financial portfolio fixed income, I would actually refer to it as your portfolio’s new rabbit. It doesn’t have a theme, so it doesn’t have an energy booster to grow wealth at the rate that equity makes possible.
What about liquidity, fixed income is always less liquid than equities. Really?
There is absolutely no problem with the liquidity of the secondary market of treasury bonds. Don’t worry at all. The liquidity of corporate bonds relative to treasury bonds is definitely relatively low, which is why we tell investors who participate through open-ended mutual funds. Portfolio managers are doing that, managing your interest rate risk, managing your liquidity risk because you have a daily payout, it’s a daily in and out of a fund, an open-ended fund, and of course when you’re managing credit risk, it’s a When investing in fixed income, you must manage and keep the troika of risk in mind. So keep this in mind when you use your vehicle to participate in fixed income. Mutual funds are one such tool.
If you invest in fixed instruments, it is entirely part of your risk appetite. What about age, because in equity, the rule of thumb generally says that the higher the age, the lower the risk in equity. Is the opposite when you invest in fixed income?
If I were an entrepreneur who sold my business at a very young age and made a lot of money and didn’t have any desire or desire to really expand it and I was doing some other tertiary business then my only The goal is to keep that wealth. So even though you are very young, no matter what age you are, the main goal is to preserve the wealth you have created. But for this type of investor, fixed income plays a dominant role.
So age is a necessary condition, but not a sufficient condition for deciding how much money should actually go into fixed income.
Finally, even for fixed investments, does higher return require higher risk?
Of course, you know, the sweeter your rasagullas, the tastier it will be. Yes, the potential for extra rewards is definitely higher, but keep in mind that the faster you go 100-120-130 km/h, the more likely you are to have an accident – in this case , which is credit default.
Therefore, higher risk comes with higher return potential, and equally high risk risk. Remember this and weigh your balance as well. The higher you go over the term, the higher your chances of making money with favorable interest rates.
In a global context, when you’re talking about the UK and the Eurozone as a whole now, what do you really care about?
The biggest concern right now is how much these policymakers can raise interest rates. This is important because inflation is spreading rapidly, both in the US and in Europe. Most of these economies are likely to raise interest rates by 50 to 75 basis points in upcoming policies. This is not the case for India, but India cannot avoid the impact because it is part of an emerging market. When a developed economy, especially the US, does something like this, their currency starts to strengthen. These are factors that we cannot ignore.
We will obviously act on our disease, which is much more severe than in the West, so the medicine will be different. But we need to pay attention. Even a viral fever needs some treatment.