As bond yields have exhibited volatility, is this the right time to enter an income fund?
Siddharth Bhatnagar, via e-mail
There is no such thing as the 'right' time to enter an income fund, or any other fund for that matter. It's impossible to time the market. The only thing that counts is your financial need and the duration of stay with a fund. If you want capital preservation with steady growth of income, then an income fund is what you need. Investing in income funds for a minimum of a year should help you overcome the volatility in debt markets. And this includes the current fluctuations in bond prices. As for timing, no one can predict it successfully on a consistent basis. In the past year, analysts have been saying that the rally in bond markets was unsustainable. And each time yields fell it was said that the party was over. But the rally continued as interest rates fell.
As war fears intensified, it seemed that the rally was over. The yield on the 10-year government paper rose from an all-time low of 5.86 per cent on January 22, 2003 to touch 6.76 per cent (February 14). Come February 28 (Budget day), things changed again. Yields reversed direction and fell sharply to 5.96 per cent. Incidentally, none of this was 'predicted' or anticipated. Since it's almost impossible to predict which way the market is going, it's also difficult to say accurately if it is time to invest or not.
If volatility bothers you and you have a short-term horizon of just three months, then ultra short-term debt funds should be your choice. This category has the lowest risk-return profile among all funds. If you are inclined to stay invested for six months, then a short-term fund will be fine. For those with an investment horizon of a year or more, income/gilt funds should fit the bill. As is evident, there are a number of products to match different risk-return needs. Therefore, pick a fund that meets your investment requirement.