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Debt markets: Down, down, down
June 24, 2004 07:58 IST
Well, it's not just the stock markets, which are going through a bear phase. The debt markets too have been hit hard by incessant selling. The yield on the benchmark 10-year government bond has touched a high of 5.69 per cent, up from just 4.92 per cent early this year. It is widely expected that the debt markets will continue to remain weak. The rise in interest rates was something that was widely expected. This was largely due to two reasons: 1) A rise in global interest rates (the US central bank which is meeting on the 29th of June is widely expected to announce a hike in interest rates). 2) Increase in oil prices, which led to fears of higher inflation . However, the speed at which the correction is taking place has surprised many.
Detailed listing of G-Secs What does this mean for you?
If you are a investor in income/g-sec funds
If you are already invested in long term income and g-sec funds then you have already suffered significant erosion in the value of your investments. On the positive side, your investments, from here onwards, will yield higher returns as general interest rates are higher. So, if your exposure to debt securities is in line with your planned asset allocation, you probably should hold onto these investments. In any case the fund managers have reduced the 'riskiness' of such schemes by investing more in shorter duration paper (the longer the duration of the paper, the higher is the impact of a rise/decline in interest rates). Gilt funds crash| Gilt Funds (Long Term) | NAV (Rs) | 1-Wk | 1-Mth | 6-Mth | 1-Yr | Inc. | | IL&FS GILT LP G | 13.63 | -0.75% | -1.92% | -0.38% | 5.58% | 13.70% | | MAGNUM GILT LTP G | 15.81 | -0.74% | -2.01% | -0.24% | 4.73% | 14.08% | | FIRST INDIA GILT G | 11.43 | -0.73% | -1.83% | -0.54% | 3.23% | 6.03% | | PRINCIPAL GILT IP G | 14.46 | -0.68% | -1.65% | 0.01% | 5.44% | 13.93% | | HDFC SOVEREIGN GILT IP G | 15.29 | -0.63% | -1.42% | 0.20% | 4.35% | 10.23% |
NAVs sourced from Credence Analytics.
NAVs as on June 21, 2004. Growth over 1-Yr is annualised compounded
If you are invested in fixed income instruments Since these instruments are for a fixed duration, there is little that you can do. However, if such investments are coming up for renewal, you probably should go in for shorter duration deposits, so that you do not lose out in case interest rates were to move up further.
If you are a investor in stocks / equity mutual funds The impact of higher rates on stocks is wide and varied. A more detailed note is available here: Interest rates and the stock markets
If you are liquid and are considering making fresh investments Avoid locking in your money in long term fixed income instruments like deposits. Also, avoid investing in long term income and G-Sec funds. Opt for floating rate funds. Once interest rates stabilise, these funds can be parked in the income and g-sec funds. . . . but floating rate funds survive| Gilt Funds (Long Term) | NAV (Rs) | 1-Wk | 1-Mth | 6-Mth | 1-Yr | Inc. | | DEUTSCHE FLOATING RATE G | 10.31 | 0.09% | 0.38% | 2.24% | NA | 3.03% | | KOTAK FLOATER G | 10.48 | 0.09% | 0.38% | 2.24% | NA | 4.79% | | TEMPLETON FLOAT LTP G | 11.56 | 0.09% | 0.36% | 2.40% | 4.99% | 6.24% | | GRINDLAYS FLOATING RATE G | 10.10 | 0.09% | 0.38% | NA | NA | 0.99% | | BIRLA FLOATING RATE LTP G | 10.54 | 0.08% | 0.38% | 2.28% | 5.13% | 5.12% |
NAVs sourced from Credence Analytics.
NAVs as on June 21, 2004. Growth over 1-year is annualised compounded
Calculate the impact of higher interest rates
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