isn't it a good time to invest in debt funds

[lotmanythings]

From the following reasoning I have concluded that now is a good time to invest
in debt funds. Is my reasoning correct ?

Low bank interest rates -> less people invest in bank fds -> banks have less
money to loan -> banks loan at high rates -> bond rates are high -> debt funds
will give good returns.

-> to be read as implies

but it may be argued that low bank interest rates -> low bank loan rates

so which one of the above arguments is correct.
and is my reasoning correct?

if yes which debt fund is good.

I am quite an amateur as far as finance goes just trying to make some sense
out of it.

Thanks for reading

 

[Capricorn]

Debt funds do well in a regime of falling interest rates. With yesterdays signal of FED's tightening of rates and if RBI follows the lead it doesn't look so good for debt funds. Look to enter debt when interest rates are at a high. Cheers.

 

[milind]

Debt funds do well in a regime of falling interest rates. With yesterdays signal of FED's tightening of rates and if RBI follows the lead it doesn't look so good for debt funds. Look to enter debt when interest rates are at a high. Cheers.

Agree with Capricorn. Debt funds are better in high rate (and NOT in rising rate) regime.

Banks are paying lower FD rates because demand for money is less. But we are at the bottom of the curve.

Interest rates are going to rise now - HDFC started with hike in FD rates this week. RBI and other central banks across the world are going to start raising rates, if not started already. In that case, bond values will drop resulting in negative returns on debt funds.

Another factor is how much deficit requires to be funded for coming budget. If it is large amount like last couple of years (oil/fertilizer subsidy, excessive handouts etc), there will be large supply of bonds adding to the pressure on the rates.

In rising rate environment, shorter maturity debt is recommended.

-- Milind

 

[lotmanythings]

Dear Milind,

I would be very grateful if you clarify the following points

1. Aren't Indian banks interest rates decided by RBI rather than the demand for
money?
2. And if the demand for money is low then why is it low?
3. I though a bond is an agreement on a predetermined interest rate so how can
bond values fall and if a debt fund has already invested in them I don't see why
returns should be negative
4.What are the current corporate loan rates for real estate.

Thank You

 

[milind]

I would be very grateful if you clarify the following points

1. Aren't Indian banks interest rates decided by RBI rather than the demand for money?

RBI indirectly controls the interest rates in market through CRR (what fraction of deposits should be retained by a bank as cash), Repo Rate (Interest rate for banks borrowing money from RBI), and Rev Repo Rate (Interest on Banks depositing their money with RBI). These determine cost of funds for the bank. Supply and Demand for money is the other important factor.

2. And if the demand for money is low then why is it low?

2008 recession

3. I though a bond is an agreement on a predetermined interest rate so how can bond values fall and if a debt fund has already invested in them I don't see why returns should be negative

Yes, if you hold the bond through maturity, you will get your principle back. However, bonds are traded just like other investment instruments. e.g. All government debt is auctioned off. So a 20yr $1000 bond with 6% interest coupon may get sold for $900 if prevailing long term yields in market are 6.67% at the time. NAVs of debt funds would be computed based on current market value of the holdings and not the value at maturity of the debt they hold - this will fluctuate with current interest rates. Longer the maturity, higher the interest sensitivity

4.What are the current corporate loan rates for real estate.

I don't have latest data, but have seen rates between 8-12%. Riskier the proposition, higher the rate.

 

[lotmanythings]

Dear Milind,
Now I understand why debt funds NAV would decrease in a regime of rising
interest rates. :clap:

Can you tell me with reasons when is it usually the best time to invest in equity funds.

Thank you very much.

 

[TheTVDudedede]

Hi, I'm new to the forum

Hello,

I'm an avid Family Guy Fan, have made my own website - see my signature if you want to view it.

Just browsing the forum as I am interested in it.

Hoping to get to make some ebuddies here!

 

[Fortantimme]

so interesting..thanks for the idea..please do share more info.

 

[sonu145]

Now the markets for Debt funds are quite lucrative.....But this will continue only for the next few months say 4-6 months.......

We can expect good movement in gilt from here, Bond funds have already given decent returns to investor....So definately right time to invest in Debt market....

But pls avoid 1 yrs FMPs as the yield are not attractive.,....in certain case if someone wants to invest then go for Liquid Plus Category or short term fund.