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Bond Funds: Buy? Sell? Hold?

Rupee breached 48.10 against dollar. Bond yields climbed rapidly this morning. Panic struck fixed income investors are contemplating shifting to cash funds or turn their investment in cash altogether. A quick analysis and fund managers' views on the current situation.

After unprecedented returns from bond funds, a sharp drop in net asset values coupled with a free fall in rupee has investors worried. This morning, the rupee breached the 48-levelt and touched a new historic low of 48.15 against the dollar before recovering marginally to 48.10. On the other hand, the yield on the benchmark 10-year paper (11.50%, 2011) shot up by nearly 100 basis points to 10.05% against 9.12% on September 11 (prior to the attacks). However, the yield went down to 9.90 after RBI decided to open a purchase window on Tuesday. While this may abate selling, the security/securities and the price is still not known.

When the markets are in panic, cash seems to be the best bet. Value Research has been inundated with calls from anxious investors, who want to know whether it is time to run and invest in cash funds. After all, investors have pumped a massive (net) Rs. 10,833 crore in bond and gilt funds since the beginning of the current fiscal. While the conventional wisdom says that you should stay put, Value Research spoke to some fund mangers on their short-term outlook and whether its time for a switch. However, with unpredictability looming large, fund managers too seem to be groping for answers though they advice that investors should invest fresh money systematically now to ride out the volatility.

Dhawal Dalal, Fund Manager, DSP Merrill Lynch Asset Management
Short-term Outlook
I still do not know what is the downside from current levels. The sentiment continues to be battered. With RBI deciding to open a purchase window, selling may stop. On Shifting to Cash Funds However, it is very difficult to say whether investors should exit or stay put in bond funds.

Rajiv Anand, Head - Investments, Standard Chartered Asset Management
Short-term Outlook
The short-term outlook is grim. On one hand, there is a very strong possibility of rate action with rate cut in the United States and a CRR or a bank rate cut in the domestic market. Further, RBI is expected to come and support both the rupee and the bond market. On the other hand, it is still not clear what's going to happen once US retaliates. We are perceived to be in the war zone and that is a cause of concern. Thus, FII/FDI inflo3s are under pressure. On Shifting to Cash Funds However, 75-80% of the fall has already happened. Its makes sense to shift to cash funds if you are extremely bearish and think that India is going to be dragged into a war.

Sandesh Kirkire, Fund Manager, Kotak Mahindra Asset Management
Short-term Outlook
Essentially the crash has happened and the yield curve has sharpened. It has been an overreaction in Indian markets and I do not see it sharpening further. However, in the next 2-3 months, volatility is going to be severe till markets world-over stabilise. In fact, across the world, yields have been coming down. Oil is the main issue for us and we have to see how oil prices behave. On Shifting to Cash Funds It is difficult to take a call on whether investors should move to cash funds. If you move to cash funds now, you will not be able to catch the upswing in prices. Investors, who entered bond funds with a time horizon of one-year in as late as August 2001 can still expect an 8-10 per cent return. On the other hand, fresh investments can be put in a liquid fund and investors then can gradually (systematically) move to bond funds or space their entry into bond funds.

Prashant Jain, CIO, Zurich India Asset Management
Short-term Outlook
The pressure on rupee should ease shortly. Basically, RBI wanted rupee to depreciate and they have achieved it in the current downturn. Further, the current yield levels in the bond market are not sustainable and prices should move up, thus dragging down yields. On Shifting to Cash Funds If you have a slightly bearish view, then it is different. However, the yield on bond funds is much better now. It is better at this juncture that investors put their money systematically by way of 4-5 cheques.