Your Money: All the good news is there in the price

financialexpress.com:

For some time, there is a positivity going around in the context of bond / debt fund investments. The views driving it are (a) RBI rate hikes are over, rate cuts are likely next year (b) inflation has peaked out © fiscal deficit, though on the higher side, is gradually coming down (d) global rate hikes are in the last leg and (e) India is being included in JP Morgan bond index, which will lead to inflows from abroad. All these are correct, and will play out. However, one simple aspect to be kept in mind is that in the immediate term, all the good news is there in the price.

Some more momentum driven movement in the market is possible. The 10-year government security yield is currently hovering in the range of 7.1 to 7.2%; if the positivity persists, 10-year yield may touch / breach 7%. However, for a sustained rally, we will have to wait for some time, probably till next year, for signs of the RBI initiating a rate cut cycle.

Stick to basics
The sensible thing to do, for debt fund investors, is to stick to the basics. The basic of debt fund investments is that, look at the portfolio maturity of the fund, and enter with an investment horizon equal to, or maybe a little lower, than the portfolio maturity. As an example, if a corporate bond fund has a portfolio maturity of say, four years, invest with a horizon of four years, or maybe say, three years. If a money market fund has a portfolio maturity of one year, enter with a horizon of one year or say, nine months.

The rationale is, if the market is volatile in an unfavourable way, the time horizon provides the cushion. Debt funds earn from two avenues: accrual, which is the coupon / interest on the instruments in the portfolio accounted for every day, and mark-to-market