2 days ago
High-Yield Long-Duration Funds Face Risk From Further Rate Hikes
Debt funds earn money by lending to governments and companies.
When interest rates rise, the prices of older bonds usually fall.
Long-duration funds hold bonds that are especially sensitive to these changes.
So, their high current yields do not guarantee high short-term returns.
Vaibhav Porwal expects Indian bond yields to rise further because of possible rate hikes and inflation pressure.
Investors who need their money in three to five years may prefer short-duration or target-maturity funds.
These options generally fluctuate less when rates change.
Long-duration funds may become more useful later if the Reserve Bank of India starts cutting rates.
India’s 10-year government bond yield reached about 7.07% on 21 September after five weekly increases.
Long-duration debt funds offer running yields of roughly 7.50-7.80%, but rising yields can reduce their NAVs.
Vaibhav Porwal expects Indian bond yields to rise further in Q3 and Q4 FY27.
Short-duration funds and target-maturity funds may better suit investors with three- to five-year horizons.
Porwal recommends keeping long-duration funds as a small tactical allocation, currently near zero.
- Who
- Debt-fund investors and Vaibhav Porwal, co-founder of Dezerv.
- What
- Investors are weighing attractive long-duration fund yields against the risk of losses if bond yields rise further.
- Where
- India’s bond market.
- When
- The benchmark yield was reported on 21 September, with further increases expected in Q3 and Q4 FY27.
- Why
- Higher inflation and possible interest-rate hikes could push yields higher, lowering the prices and NAVs of long-duration bond funds.
Lock In Current Yields
Limit Duration Risk
Investment choice
Lock In Current Yields
Long-duration funds provide relatively high running yields and could deliver capital gains if interest rates eventually fall.
Limit Duration Risk
Investors should avoid aggressive long-duration exposure while yields may rise, because falling bond prices could erase short-term income.
Three- to five-year horizon
Lock In Current Yields
Investors may be attracted by the higher yields available from longer-duration bonds.
Limit Duration Risk
Short-duration or target-maturity funds better match this horizon and generally have lower sensitivity to rate movements.
Key facts
- 10-year government bond yield
- About 7.07% on 21 September
- Long-duration fund yields
- Approximately 7.50-7.80%
- Short-duration fund yields
- Approximately 7-7.50%
- Major bank fixed-deposit rates
- Approximately 6.50-7.15%
- Target-maturity fund yields
- Approximately 6.75-7.10% for three- to five-year funds
- Suggested long-duration allocation
- About 0-15% tactically; currently near zero under Porwal’s outlook
Quotes
Vaibhav Porwal
Co-founder of Dezerv and the article’s source on debt-fund strategy
“Long-duration funds offer high running yields (accrual) and the potential for substantial capital gains during interest rate cuts.”
livemint.com
“If yields rise, the mark-to-market price losses due to high duration sensitivity can erase short-term accrual income.”
livemint.com
Sources
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