Increase allocation to shorter duration funds to insulate your bond portfolio from rising yields

Increase allocation to shorter duration funds to insulate your bond portfolio from rising yields

As we come towards the end of the rate reduction cycle and the beginning of the normalisation of monetary policy over the course of next 12 to 18 months, fixed income investors are getting anxious about the impact on their investments. We try and address these concerns of fixed income investors regarding the potential impact of the changing Interest rate cycle. Interest rates generally revert to the mean, which means that they are cyclical. Thus, the duration- play in fixed Income investment is a cyclical game. In India, over the last 20 years, we have seen 4-5 cycles with interest rates moving in a cyclical way. During the course of these cycles, the benchmark yields have ranged from 5-9 percent, but debt mutual funds have been able to successfully navigate this volatility, thus generating decent returns for investors over a period of time. In an actively managed open-ended fund, investors need not worry about the cyclical movement of rates. In other words, during a change in the interest rate cycle, actively managed funds tend to adjust their portfolio duration in …
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