Is it time to shift your money from dynamic bond funds?
Investment experts are asking their clients to put money in accrual funds. The advice is a departure from their earlier stance of sticking to dynamic bond funds for the time being. According to experts, the shift is mainly because of the emerging interest rate scenario after the currency withdrawal by the central government.
"Till now, we were focussing on dynamic bond funds because there was a 170-basis points rate cut in the past one and a half years. Duration funds were gaining because of this," says Prakash Prahraj, a Certified Financial Planner based in Mumbai. "We don't expect much change in the repo rates in the coming year. So, the probability of duration funds gaining is less. In such times, it is always good to go for accrual funds," he adds.
According to him, investors can expect around 9-10 per cent from accrual funds.
The last year saw RBI cutting rates twice. The repo rate stands at 6.25 per cent after the last rate cut in October, 2016. In the falling rate scenario, experts suggest dynamic bond funds to common investors who can't time the entry and exit into long-term debt schemes. Moreover, in a dynamic bond fund, the fund manager can take calls depending on the market scenario.
Accrual funds focus on earning interest income from the coupon offered by bonds. In contrast, the duration funds generate returns from interest rate fall. Accrual funds generally tend to be less volatile than duration funds.
Suresh Sadagopan, Founder, Ladder7 Financial Advisories, says financial advisors are asking their clients to invest in accrual funds to "protect yields" that have gone down after the currency withdrawal by the central government. The banking system is awash with funds because of the currency restrictions imposed by the government, and this has dragged the yields down.
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