Bond markets: Cues for investors

One of the key factors that impacts bond prices is interest rate movements in the economy. If rates move up, bond prices fall. This is because investors flock to newer bonds that offer higher rates. This reduces the attractiveness of older bonds and hence their prices decline. Thus rates and bond prices have an inverse relationship.

As longer duration bonds are more sensitive to interest rates, at the bottom of the rate easing cycle as is the case now, it would make sense to avoid investing in longer term gilt funds. This means that you should avoid betting on ‘duration’ to insulate yourself from interest rate risk.

But this does not mean that investors should shun debt funds altogether. Investors willing to take some market risk should continue to invest in debt funds that offer far better returns than plain Jane bank deposits. A chunk of your investments should be in short-term income funds that carry less volatility in returns. Short-term income funds and Banking and PSU Debt Funds may be ideal.

Short-term income funds invest in debt securities that mature up to 3-4 years. Their portfolios usually have a small allocation to long-term gilts and higher allocation to AAA-rated corporate bonds. Banking and PSU Debt Funds, which are short term debt funds, minimise risk by investing in good-quality debt instruments, mainly issued by banks and public sector undertakings.

Within the short term income category, Aditya Birla Sun Life Savings Fund, Aditya Birla Sun Life Treasury Optimizer, HDFC Regular Savings, ICICI Pru Short Term, and UTI Short Term Income are some of the consistently performing funds with lower exposure to riskier bonds.

Within banking and PSU debt funds, Axis Banking & PSU Debt, ICICI Pru Banking & PSU Debt, and UTI Banking and PSU Debt are some of the top performing funds.