Bond funds have given negative or no returns in the last one year. I believe the primary reason behind it is the increase in the bond yields. Now, bond yields are stabilising around 3 per cent in US. Do you think the bond yields in India will also stabilise now? Will these funds now give positive returns?
-Navneet
We usually look for certainty of income when we invest in bond funds. It is not that all the bond funds have given negative returns. It is the case mostly with long-term bond funds. People were expecting a fall in the interest rate. But opposite to the expectation, there have been an increase in the interest rates. The bond yields have a inverse relationship with them. When there is an increase in the interest rates, the value of bond funds fall. And when there is a fall in interest rates, bond funds rise.
And we are not very much related to foreign market. We have our own internal dynamics. It is based on the inflation and money supply situation. RBI's decision is based on these factors which impact the outlook of bond funds. From that perspective, I think we have arrived at a very neutral stance. Now there are more talks of inflation growth rather than targeting. So, there are chances that there will be a fall in the interest rates because of which bond funds will benefit.
The other benefit of bond funds is the return with stability. Even if there are negative returns, heavy capital erosion is not there. And, the reason why there was a downfall in some liquid and bond funds in the last few days was also because of the disruption and the default by IL&FS. But I feel this is a one-off event. I don't think this will majorly impact interest rates.
This article was originally published on November 15, 2018.
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