As the interest rates fall, bond investors are expected to be on cloud nine. Thanks to the inverse relativity between the Interest rates and bond prices, bond investors gain on the non asset value of the funds due to a meltdown in interest rates. That’s the general rule of thumb. Earlier this year, the interest rate, that is the repo rate at which RBI lends to other banks, was drastically cut down by a total of 75 bps, because of this, a good increase in the bond prices was expected, but did not happen.
The long-term income and gilt funds that offered average returns of 14 and 17 per cent, respectively in January 2014, are now offering only 10 and 12.5 per cent returns, respectively. Regarding this, Rahul Goswami, chief investment officer (CIO), fixed income, ICICI Prudential AMC states, “There are various reasons for this aberration. Bond markets have been doing trades cautiously on account of worries regarding monsoon uncertainty, fearing upside in retail inflation, global bond markets-sell off and a probable US Fed rate hike. Besides, the global macro situation, led by Greece continues, to deteriorate.” These factors have resulted in huge volatility in bond yields globally, which in turn impacted the yields in Indian market as well.
In addition to that, the flow of the Indian currency combined with the ventures by Foreign Institutional Investors in bond markets have an impact on fund returns. When the FIIs withdrew $1.3 billion, the Indian debt market was swayed by the strain of outflow. This was the first outflow since April 2014 calendar year 2015 YTD. The experts say that any sell happening at a large scale is expected to have a detrimental impact on bond prices. Nonetheless, chances are that a cut in prices in the background of a pickup in monsoon will make things better. This will reduce woes of inflation and several economic factors including a low current account shortfall and fixing government finances. "Hence, once the worries over monsoon and global uncertainties subside, RBI could further reduce rates by 50-75 bps in the remaining part of the financial year," Goswami further explained.
The yield in 10-year Government Securities is sailing at around 7.8 per cent. They are expected to be in the range between 7.25 to 7.50 per cent in the duration of one year. This expected devaluation in yield could boost the bond prices further advancing to capital appreciation. Therefore, investors with long-term investment plans can invest in duration funds in order to gain a higher earning potential by capital appreciation.