Debt Mutual
Fund: Interest rate effect
In India,
the reach and awareness of mutual fund is still very low. People do not
understand the difference between equity and debt asset class. Investors often
consider all type of mutual fund in the same way. Today we will discuss about
the impact of interest rate movement on debt mutual fund.
In debt
mutual fund, we can divide it into three broad categories liquid fund, FMP and
Income fund. Liquid fund has very low volatility and government bonds are very high
volatile product in short term. On the basis of historical data of interest
rate movement and debt fund return we have arrived on some facts.
Whenever the
expectation of interest rate is going towards up then investor should be
defensive and should consider liquid fund or FMP fund. The difference between
liquid and FMP funds is nothing but the time period. Liquid fund is suitable
for short term investment like 1 or 2 months. FMP is for the fixed lock in
period investment and do not get affected from interest rate movement at the
time of maturity. The only risk in the FMP is opportunity loss if any arises
during the investment period.
During the
falling interest rate scenario, long term bond investors get benefit. In longer
maturity bond portfolio, one term called modified duration play vital role for
return generation. For example, two long term duration funds have modified
durations 4 year and 7 year. If interest rate moves down 1% then 4 year’s
modified duration fund would generate 4% additional return whereas 7 year’s
modified duration fund generate 7% additional return. But unfortunately if
interest rate goes up 1% then these funds generates negative return according
to the modified duration. Exposure in long term bond fund should be taken
according to the risk appetite of investors.
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
No comments:
Post a Comment