How to get benefit from interest rate cut?
These
types of questions commonly asked and discussed in the investors or fund
managers forums. What should you do in current scenario when majority of
analyst expect rate cut within a year as government’s fiscal deficit number and
Indian rupee dollar exchange rate also improving. We have already seen rupee
dollar exchange rate around 60 and expected even below from current 60.
As a gilt
fund are most interest rate sensitive so to take advantage from interest rate
cut investor should go with these types of fund. Although it is tough to
predict when rate cut will happen so there may be some wild moment happen in
NAV of these types of fund. But if you have time horizon around 2 year you
should definitely go with long duration fund to take advantage of interest rate
fall. There are chances of double digit return from the long duration fund.
For
example, if fund’s yield to maturity (YTM) is 10% and modified duration is 3
year. In this case if interest rate cut by 100 bps point then the total return
would be (YTM+Modified Duration) 13% and if interest rate go up by 100 bps then
the return would be 7%. If the interest rate remain unchanged, in that case
investor earn around 10%. The return is totally depend on interest rate
movement.
Many fund
house like Franklin Templeton, Birla Sunlife, IDFC, HDFC etc. offering very
attractive debt funds. Investor should have the patience to wait for the rate
cut. For those who do not have risk appetite and cannot wait for one and half
or 2 year, those investor should invest in short term bond fund.
If you
have more than one year time horizon and do not want take any risk in that case
you should go with FMPs (Fixed Maturity Plan) as it give indexation benefit
also.
For all our investors and readers
Happy Navratri, Happy Nav Vikrami Samvat and Happy Gudi Padwa. I wish for all
of you happy and prosperous life. If you want more information regarding investment
or you have any other query about investment feel free to ask us.
Warm regards,
Arvind Trivedi
Certified
Financial Planner
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