While the view on debt funds is positive, you have to wait for a rally.
For some time, there is a positivity going around in the context of bond / debt fund investments, apart from last Friday’s market reaction post the RBI policy review. The views that drove the positivity are (a) RBI rate hikes are over, rate cuts are likely next year (b) inflation has peaked out (c) fiscal deficit, though on the higher side, is gradually coming down (d) global rate hikes are in the last leg and (e) India is being included in JP Morgan bond index, which will lead to inflows from abroad. All these are correct, and will play out. Currently, post the correction on Friday, entry levels are that much better.
However, in the immediate term, all the good news is there in the price. For a sustained rally, we will have to wait for some time, probably till next year, for signs of the RBI initiating a rate cut cycle. If you are playing for the rally, i.e. yield levels coming down significantly and benefitting from the mark-to-market of bonds in the portfolio, it depends on certain variables. The sensible thing to do, for debt fund investors, is to stick to the basics. The basic of debt fund investments is that, look at the portfolio maturity of the fund, and enter with an investment horizon equal to, or maybe a little lower, than the portfolio maturity.
Portfolio maturity
As an example, if a corporate bond fund has a portfolio maturity of say, four years, invest with a horizon of four years, or maybe say, three years. The rationale is, if the market is volatile in an unfavourable way, i.e., yield levels move up, the time horizon provides the cushion. Debt funds earn from two avenues: accrual, which is the coupon / interest on the instruments in the portfolio which is accounted for every day, and mark-to-market gains/ losses, which is as per that day’s market movement.
Playing for a rally
If you are playing for a rally in debt funds over the short term, by investing in debt funds with a long portfolio maturity which would gain more if yield levels come down, gains are possible. However, it is contingent upon certain variables. Inflation for one. While we expect inflation to ease, if it does not ease as much, or it does not ease the RBI’s comfort zone to talk of rate cuts, it will take that much more time. Global bond index inclusion is definitely positive, but inclusion in the JP Morgan index will start in phases from June 2024. A different way of looking at it is, if you are looking at market-driven gains, you can see that risk in the equity component of your portfolio. In the debt component as well, you can take dynamic calls, when there is a high degree of conviction on the view. At this juncture, while the view is positive, all the known good news is already known and there in the price levels.
As long as you are an investor and not a trader, your view should be for the long term. You may take occasional tactical calls based on market movement, when your view is bright and clear. A view will always be dependent on certain variables, but the degree of conviction varies.
Source: https://www.financialexpress.com/money/your-money-all-the-good-news-is-there-in-the-price-3266420/