I want to know how an interest rate hike affects the NAV of a bond fund.
When interest rates go up, bonds go down in value. This is what we have witnessed over the past 1 – 1.5 years. Income funds, where the fund manager has the mandate to take a view on the rates and change the portfolio’s maturity get affected by the movement in interest rates. The funds with longer term maturity fall more, while the funds with shorter maturity are more insulated from rate hikes. This is why liquid funds, short-term bond funds and ultra short-term bond funds have shown high yields. On the other hand, income funds, which take modest bets on different occasions haven’t delivered meaningful returns because many a times, the interest rate hikes have come as a surprise.