Volatility ahead for debt funds with exposure to AT1 bonds

Debt funds investing in Additional Tier 1 (AT1) bonds will likely undergo significant changes from April 1, 2023. Why? Because AT1 bonds will be treated as 100-year bonds, they will be exposed to interest rate risks, making them extremely volatile. That's because there's an inverse relationship between bond yield and price. If the bond price falls, its yield goes up. In that case, the NAV of your debt fund will fall too because it derives its value from the price of the bonds it holds. Also bear in mind that higher the bond maturity, the higher is the impact. Given that AT1 will be treated as 100-year instruments, any fall in bond price would be damaging for them, something echoed by Sandeep Bagla, the CEO of TRUST AMC: "I think there will be volatility in the yields of these bonds." Bagla also feels their demand will nosedive. "Liquidity is likely to come down in AT1 bonds due to their valuations... fund houses might not invest in such bonds