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Dynamic Bond Funds, Gold Funds Ideal Now – Money News
INDIVIDUALS SHOULD NOW consider investing in long-term debt mutual funds to take advantage of the capital appreciation opportunity. When rates fall, the value of long-term bond funds such as dynamic bond funds and gilt funds increases, offering the potential for good returns.
The expected decline in gross revenue Marketplace borrowing is positive for bond markets, and the inclusion of government bonds in the global bond index will open up a new source of demand from foreign investors. These factors will increase flow into the debt segment and reinforce investor confidence.
The longer the duration of the bond fund, the more it will benefit from falling interest rates. Pankaj Pathak, Senior Fund Manager, Fixed Income, Quantum mutual fundsays the favorable shift in the mix of demand and supply is driving long-duration bond yields lower. “Long-term bond funds tend to benefit in this type of market environment. For investors, dynamic bonds are more suitable than most other long duration categories due to their flexibility to change portfolio positioning if the market environment changes,” says Pathak.
The longer duration of these funds has had a knock-on effect, leading to mark-to-market gains and capital appreciation. Nirav Karkera, head of research at Fisdom, says current trends suggest that bond yields are likely to decline further, potentially leading to capital appreciation for investors. “In anticipation of interest rates falling later this year, investors may consider long duration or gilt funds as preferred options, as these funds are considered risk-free investments, further increasing their appeal,” he explains.
Long duration or gilt funds often offer higher coupon payments compared to shorter duration bonds, increasing investors’ returns in a low interest rate environment. Furthermore, the longer duration of these funds amplifies their sensitivity to changes in interest rates, making them more attractive as rates decrease. Thus, the combination of yield fixation, potential capital appreciation, higher coupon payments and safety positions long duration or gilt funds as attractive options for investors anticipating falling interest rates.
Diversify between types of securities
Diversification across security types, sectors and issuers is crucial to effectively allocate risk, especially in today’s market environment. If one issuer experiences financial stress and default, the losses can be offset by gains or stability in securities from other issuers, thereby reducing the impact on the overall portfolio. By diversifying across sectors, investors can mitigate these sector-specific risks and ensure that their portfolio is not overly exposed to any economic downturn.
Anil Rego, founder of Right Horizons, says diversification across bond types is crucial to effectively spread risk, as it mitigates the impact of any single bond default or sector underperformance, thereby improving portfolio stability. “Given the current economic uncertainties and disparate performance across sectors, a diversified bond portfolio can better withstand market volatility and economic fluctuations,” he says.
Interest rate fluctuations also affect bonds in several ways. Long-term bonds are more sensitive to changes in interest rates than short-term bonds. By holding a mix of short, medium and long-term bonds, investors can balance their portfolio’s sensitivity to changes in interest rates, protecting them against potential losses due to rate rises.
Puneet Sharma, CEO of Whitespace Alpha, an online investment platform, says a well-diversified bond portfolio will act as a hedge against market uncertainties, provide a more stable overall performance and allow investors to pursue their financial goals with greater confidence and reduced risk.
Factors to Consider Before investing
Because long-duration funds are highly sensitive to changes in interest rates, they are best for long-term investors who can tolerate short-term volatility and hold positions without panicking. Returns are taxed at the investor’s marginal rate, impacting net returns, especially for those in tax brackets.