Hello Readers!
Recently we saw that the NAV of the Debt Funds experienced a sharp fall, the reason behind this is taken the rise in bond yields after the announcement of massive government borrowing in the budget.
As per the data shown by Value Research the gilt funds and long-duration funds declined the most Even less-risky short-duration bond funds have lost money. Of the 28 short-duration funds, 20 schemes have decreased in value in three months ended March 4, 2021.
As per experts, the investors can overcome this volatility in debt funds if they stay invested for 3-4 years but…but…what about the investors who want to invest only for 1 year or 6 months. Here the matter to consider is, where to invest for short-term objectives!
Well, experts say, investors with a short-term investment like 1 year can go investing in Money Market Funds or Low-Duration Schemes!!
How Do These Funds Work?
Low Duration Funds invest in debt and money market securities, the duration of the portfolio of these funds are generally kept from 6 to 12 months. While money market fund invests in debt securities that hold a maturity period within 1 year. Both these funds look similar and minimize the interest rate risk, however, they are different.
Maturity Versus Duration!
The fund manager of long-duration funds can choose different securities to invest in, it can be overnight securities or securities that mature in one year or more. They can also go choosing to mix these securities. Choosing debt bonds that mature after 1 year brings in higher interest income and also increased interest rate risk.
However, the scene is different with the low-duration fund. As it has a duration between 6-12 months, that means some of these securities can be of shorter duration or longer period. However, it has to be made sure that the duration is within the SEBI-prescribed limit.
If we look at these funds' track record, then in the last three years these schemes have delivered 5.07% (Long-duration Fund) and 6.63 (Money Market Funds) returns. In the last three months, LDF and MMF have given 0.69 percent and 0.73 percent returns.
Can These Schemes Control Interest Rate Risk!
The scene of interest rate risk is different and very low in these Schemes, and the only reason behind it is, that these schemes are restricted to bonds maturing in short term.
A Money Market Fund cannot invest in bonds that have a maturity beyond one year, as per SEBI’s regulation, and thus scores well.
On the other hand, a low-duration fund is defined by the overall portfolio’s Macaulay duration, to enhance its returns it sometimes invests a part of its corpus in slightly long-dated securities.
Well, experts believe that investors who eager to invest for the short-term in a rising interest scenario must consider their investment in low-duration funds or money market funds. They say, investors need not worry about the interest rate risk as these schemes generally invest in bonds maturing in the short term.
Not only this but investing in a low-duration fund or money market fund during a rising market scenario give opportunities to the fund manager to reinvest their maturity proceeds at regular intervals at higher interest rates.
So basically, here the prominent tip to invest for short-term during this high volatility in long-duration debt funds are:
- Stay invested for 3-4 years to overcome this volatility.
- Or plan your investment in low-duration funds or Money market funds.
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For any kind of query you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).