Years from now you would remember the last few months of fiscal 2020-21 for a number of reasons — the arrival of a vaccine, the appearance of green shoots in some corners of the economy, the farmers’ agitation in the North and the market’s changing views on interest rates. Those were the winds of change, you would then think aloud, and may be you would recall some of the specific events and developments that you know would eventually fade into oblivion.
Casting aside oblivion and steering clear of sentiments, let us dwell on the here and the now — more specifically, on developments in the debt market, especially the probability of rising inflation.
Influential sections of the market seem to have taken this into account already; they are, in fact, well aware of the impact of factors such as the recent stimulus packages, partial opening up of the economy after the lockdown, increasing commodity prices and so on.
Informed quarters now have a pronounced leaning towards shorter duration debt products as such a stance would help in mitigating the downside risk in a scenario marked by rising rates.
I have a strong feeling that the discerning investor of the day would focus heavily on yields, and not really on the prices of securities. This, of course, is in line with the preferred trend; smarter sections of the market seem to simply love phrases like “well, the yields scenario looks primed for changes” and even “yields increased (or declined) on Monday” but not “prices declined (or advanced) on Monday”.
These participants certainly are well aware of the fact that coupons are holding steady as changing yields do not mean that coupons are changing too. A coupon is, after all, determined at the time of issuance and mostly does not alter during the existence of a security.
Investors further know that their shorter allocations would continue to fortify their total income. Bonds, for instance, keep paying interest despite changes in prices.
In fact, rising prices mean that investors could sell their holdings and derive capital gains. Here are three quick points to remember:
- Given the latest conditions, the average individual could well feel jittery. Nevertheless, there is no particular reason to panic and staying invested in shorter term fixed-income securities is absolutely the right strategy to follow for conservative investors, depending of course on risk-return expectations. There is, however, a case for expanding certain investment horizons because such a move would help investors tide over the current state of flux.
- Now, if you are a duration-oriented individual, you would do well not to get too perturbed and actually hunt for fresh opportunities in the floating rate segment. Perhaps dynamic bond funds could add a dose of freshness to your portfolio.
- If you are seeking comparatively better yield-to-maturity (YTM), you could look for specific medium-term options. Credit risk funds could be one of your consideration if you are comfortable with the volatility in the coming days.
The writer is director of Wishlist Capital Advisor