Updated - March 07, 2024 at 07:22 AM.
The fund looks to gain from the likely fall in bond yields due to multiple positive macroeconomic indicators
By Venkatasubramanian KBL Research Bureau
That the interest rate hike cycle globally has peaked has been well acknowledged for a while now. In India, the Reserve Bank last increased rates more than a year ago in February 2023. And, bond yields have been on the decline, although there are occasional spurts due to global macroeconomic and geopolitical events. The 10-year G-sec touched a high of 7.47 per cent in 2023, but has corrected and come down to 7.05 per cent levels in recent weeks.
A credible path to fiscal consolidation, improving current account deficit, inclusion of government securities in global bond indices and peaking of local and global interest rates point to softening yields over the next year or so. And rate cuts, too, may follow later this year or early in 2025.
Bond prices and yields are inversely related. Yields and interest rates move in similar directions. Thus, a softening of yields and interest rates in the future holds potential for a bond price rally in government and other long-tenured securities.
In this regard, Bandhan has rolled out a long duration fund to take advantage of the current rate and yield scenario. The NFO closes on March 18.
Read on to take an informed call on whether you should invest in the fund.
Playing the rate fall
The RBI started hiking rates from mid-2022 in response to steep inflation. The central bank increased the repo rate to 6.5 per cent by February 2023. Thereafter, the RBI has been on pause mode. Inflation is now well under control. Even the US Federal Reserve has stopped rate hikes for several months now.
With inflation coming down globally and many advanced economies facing growth challenges, the indications are that rates have topped out and now a reduction is expected in the second half of 2024 or over 2025.
India’s current account deficit is at near record lows. In the first half of FY24, the current account deficit was just $17.5 billion or about 1 per cent of GDP, much lower than the 2.9 per cent reported in the April-September period of FY23.
Fiscal deficit is also down from 6.4 per cent of GDP in FY23 to 5.8 per cent in FY24 and is further likely to decline to 5.1 per cent in FY25, going by the recent interim budget announcements.
With inflation well under check, all the above factors point to improved possibilities of interest rate cuts at some point in the future.
From June this year, JP Morgan will add Indian bonds available in the fully accessible route leading to around $24 billion in inflows. Bloomberg, too, has indicated addition of Indian bonds from January 2025, which would bring in an additional $5 billion.
These inflows can impact yields and make them move down over the medium to long term. That makes a case for bond price increase via long duration funds.
What the NFO is about
Bandhan Long Duration fund will invest in bonds and money market instruments that mature over the long-term. So, the Macaulay duration for the fund’s portfolio would be more than seven years.
As such, long duration funds are more susceptible to rate changes on the upside. Rate hikes can have an adverse impact in such funds, while rate cuts help them gain.
With the factors mentioned earlier, a rate cut over the next year or so can have a positive impact in long duration funds.
Most funds in the category do not have a long track record. In the last one year, long duration funds made the most of the fall in yield from 7.35 per cent levels to 7.05 per cent levels and recorded 9.5-11.5 per cent returns. Only Nippon India Nivesh Lakshya and ICICI Prudential Long Term Bond funds have reasonably long record of five-plus years.
Investors can consider these funds with a long-term perspective and align it to a goal.
Those wishing to take fresh guard can consider a small lump-sum in the Bandhan Long Duration NFO if they have an above-average risk appetite.
With the indexation benefit taken away from all debt funds, the only advantage they have is that gains are taxed only at the time of sale. So, there is no TDS or other deduction during the period of interest accrual or accumulation of capital gains in the funds.
Related Topics
- interest rate
- RBI and other central banks
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