by Mr. Anil Rego,
Right Horizons
Bond funds are
bundled together under one single category in the investment arena.
However, various
options are available under bond fund schemes catering to different objectives
of investors, based on time horizon & risk preference; the primary being
preservation of capital.
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| Anil Rego, Right Horizons. |
A bond fund invests /
purchases bonds of different maturity periods, thus being subject to interest
rate risk.
Any increase in the
interest rate in the economy will have a negative impact on bonds and, thus,
their prices will reduce and vice versa.
However, the extent
of impact varies & is based on the bond duration. A bond about to mature in
the near term, i.e., within 1 to 3 years, will be impacted less than one with a
long-term maturity.
Thus, a short-term
bond fund will invest in those bonds that have near-term maturity. Considering
the low risk and lower interest rate sensitivity, returns from short bonds are
also moderate.
Why short-term bond
funds?
It is advisable to go
in for short - term bond funds if you are investing for a need that might arise
in the short / medium term. Short-term bond funds also serve well as a
contingency reserve.
These funds can help
hedge interest rate fluctuations, if one expects a bear market in bond funds.
Short-term bond funds also provide high liquidity.
Risk and Yield..
Considering that a
bond fund invests in lower duration investments, they have a lower interest
rate risk compared to the long-term bond funds. Thus, one can consider
investing in a short-duration bond fund during unfavourable market conditions.
However, it is
advisable to check the interest rate sensitivity and the portfolio of a fund
before investing, since some funds might have invested in higher credit risk
investments. Not all bond funds offer lower risk; hence, it is advisable to
check the risk–return matrix before planning to invest in one.
Since the fund offers
lower degree of risk, the returns offered are also on the lower side. It is
advisable to check on the historical returns and compare within peers and also
with the current inflation rate.
Compare before you
invest..
Before the Budget of
2014, any investment in debt funds that was over & above a year enjoyed
long term status. Also, capital gain on long-term investments in debt funds
enjoyed indexation benefit. However, as per Budget 2014, an investment in debt
will be considered as long term if it has been held for more than three years.
Thus, if a person is
planning to invest in a bond fund for a tenure less than three years, and the
same is not being kept for emergency/contingency, it is advisable to compare
the returns with other asset classes like fixed deposits.
Investing in a
short-term bond..!
Short term does not
mean lower risk; it is advisable for the investors to check the details of the
fund like the portfolio composition, interest rate sensitivity, modified
duration, average maturity and yield to maturity.
About the author..
The Mr. Anil Rego
writer is CEO and founder, Right Horizons
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Bangalore - Head Office..
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Right
Horizons,
#6, Arakere Village, Begur Hobli, Bangalore - South Taluk, B.G. Road, Bangalore - 560 076. Email : contactus@righthorizons.com Email : grievance@righthorizons.com |
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Contact Numbers
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Bangalore - HSR Branch
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Right
Horizons,
1213, 1st Floor, 22nd Cross, HSR Club Road, HSR Layout, Sector-3, Bangalore-560034. Email : contactus@righthorizons.com |
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