Last updated: 17 Sep, 2020 | 03:26 pm
What’s happening in the current environment
What can be expected going forward?
What could happen in the long-term?
The current state points to a bottoming of the current interest rate cycle and rates should increase in the long term (1-3 years)
This is exactly what happened post-2008 global recession. During the crisis, RBI reduced interest from 9% to 4.75% in a span of 1 year. Then as inflation picked up, rates started increasing.
The credit risk, interest risk and liquidity risk are extremely serious in the system. It is very important to understand them before making any decision. Invest only high-quality AAA-rated bonds as they have the least risk. In fixed income securities, high risk does not mean higher returns.
There is a significant tax advantage in holding a debt fund for more than 3 years.
For a more than 3-year investment horizon, an investor should prefer short duration (duration < 3) fixed income instruments over long duration. Short duration funds might not give you that extra alpha in the short term(3-6 months) but they are highly likely to outperform long duration funds in the long term.