Use SIPs to fight market volatility

Have you been caught off guard by markets that collapse like a house of cards one day and shine brightly in the next session? If you are sitting on the sidelines, wondering about the right time to jump in, fund houses offer options that take the guesswork out of equity investing. The SIP is the oldest and most widely used weapon against market volatility in the small investor's armoury. "By investing in random time slots, the investor is able to get a good average price," says Srikanth Meenakshi, director at Fundsindia.com.

In the past few years, fund houses have fine-tuned the SIP mode of investment and made it more sophisticated. You can now invest in weekly, even daily, SIPs. You can tweak the investment amount or even choose the index level at which you want to invest. Let us look at the various innovations in the SIP and how you can use them to your advantage in today's volatile markets.

Systematic transfer plan

If you have a lump-sum amount to invest, experts advise that you put it in a debt fund and then start a systematic transfer plan (STP) into an equity fund. STPs can be of different intervals-weekly, monthly or quarterly. "The STP is a richer version of the SIP and follows the same concept of value averaging. Markets will always be volatile. The only way to manage it is through time diversification and asset allocation," says Kalpen Parekh, deputy CEO, IDFC Mutual Fund.

To start an STP, the investor must have a certain minimum amount in the debt fund. HDFC Mutual Fund, for instance, requires that the source scheme should have at least Rs 12,000. Also, the transfers are done on designated days of a month. This option suits investors who have lump-sum money, such as bonuses or sale proceeds from assets.

Flexible SIPs

One of the biggest innovations in the SIP, this allows the investor to change the SIP amount depending on the market level. ICICI Prudential's Flex STP plan, for instance, transfers a higher amount when the markets are down and reverts to the pre-set STP amount when they rise again. So, the investor is putting in more money when stock prices are low and holding back when the index is up. This adds that extra zing to his efforts at rupee cost averaging.

However, only a few mutual fund houses, such as Reliance Mutual Fund, HDFC Mutual Fund and ICICI Prudential, offer the option of flexible SIPs and STPs. But there are intermediaries who can help investors in other mutual funds. One can invest through Fundsindia.com and can call the distributor or send an e-mail for raising the investment amount. "Under the Flexi SIP Investment, the investor can increase the amount with the click of a mouse or a simple phone call, or let our system work through pre-set parameters. Instead of investing, say, Rs 5,000 a month, he can go with Rs 7,000 or Rs 10,000 if the markets are down. In this manner, he will get a much lower cost of entry," says Meenakshi.

Trigger option

Mutual funds also have trigger options to help you invest or book profits at certain index levels. When the index drops to a level predetermined by the investor, the fund transfers money from the debt scheme to the equity plan. Under the HDFC Flexi Index plan, the investor can choose 3-5 index levels and specify how much amount in the debt plan should be transferred to the equity scheme at each level. "For instance, he can choose 15% to be invested when the markets drop to 16,000, the next 15% to be invested when it drops further, and likewise at varied index levels," says Surajit Misra, executive vice-president and national head, Bajaj Capital.

Similarly, when the markets rise beyond a level specified by the investor, the equity units can be sold and money transferred to the debt scheme. More than six fund houses offer these facilities mostly for their large-cap and mid-cap funds. Here, you can invest a smaller quantum of money at select market levels or NAV levels.

Weekly & daily SIPs

The SIP investor should not pay heed to the daily ups and downs in the market. Yet, if you are worried that the markets will rise when your SIP is due and decline subsequently, you could consider spreading your investments across the month. "If the investor wants to put in Rs 20,000 every month, he can split it into four different SIPs on different days of the month," says Paul D'Souza, proprietor of Cuzinns Investment Services.

Some funds also give the option of weekly and daily SIPs and STPs. However, experts believe the daily mode is not a good option because it serves no meaningful purpose. Even fund houses are having second thoughts about this facility, which increases their back-office work by over 20 times compared with that in the monthly SIP. "Under daily SIP, the cost of operation will be high for the mutual fund house. It is operationally inconvenient," says Misra.

Even financial planners have seen their clients bearing the brunt of daily investments from their chartered accountants. "In case of daily SIPs, the chartered accountant faces a problem as he will have to feed in 300-500 transactions while calculating capital gains at the time of filing your returns when you book profits," says D'Souza.

Instead, a weekly STP works better because the volatility is getting trapped and calculations are not much of a bother, say experts. "Whether you invest every month or over 365 days, the outcome is not too different. However, there is huge paperwork involved," says Parekh.

Considering this, the handful of fund houses that have been offering the daily SIP option are mulling over discontinuing these. "We have asked our sales team to take a re-look as there are no takers for them. Besides, operationally, these are inconvenient both for the AMC and the investors," says a mutual fund spokesperson.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/use-sips-to-fight-market-volatility/articleshow/9846135.cms?curpg=2

Use SIPs to fight market volatility

A value investment plan (VIP) is a new investment option launched by a few mutual funds. This concept may gain popularity in the times to come. A VIP is supposed to be a better form of the SIP (systematic investment plan).

A VIP too follows the averaging concept. This investments strategy also works on monthly contributions. The differentiating point is the approach to the amount of each monthly contribution as compared to a SIP.

In case of a VIP, you have to set a target growth rate or amount for each month, and then adjust the next month's contribution according to the relative gain or shortfall made on the original portfolio. In this case, you have to invest more when the market prices fall. On the contrary, you have to invest less when the stock prices rise.

Your investment pattern follows the market. You buy more when the prices are low and invest less when the markets are rising - the ideal thing an investor should do. The investment pattern mirrors the market trend. For example, assume you want to add Rs 5,000 per month to your mutual fund portfolio, and on the first of the month you invest Rs 5,000. Next month say the value of your investment is Rs 5,200. So, you will invest Rs 4,800 only next month rather than Rs 5,000. The balance is contributed by selling securities of an equivalent value (Rs 200 in this case).

In the third month, let's say the value of your investment falls to Rs 8,000. You will have to contribute Rs 7,000, so as to make the target amount of Rs 15,000 (Rs 5,000 for three months). This roll-over goes on during the specified period .

With this plans, you invest a higher amount when the markets are going down. Similarly, you invest a lesser amount when the markets are going up. This is precisely what investors should do. An investor cannot predict the direction of the markets. The VIP mode of investing helps synchronise the investment amount with the market movements . In contrast, a SIP mode of investing is based on the principle of rupee cost averaging. The cost of acquisition in VIP is usually lower vis-a-vis a SIP.

Another difference from a SIP is that each month the amount to be invested will vary. In case of a SIP, a fixed amount is invested each month. In case of a VIP, the difference between the target value and the portfolio's actual market value is to be invested.

So, you cannot really plan out the cash flows with precision, because the amount to be invested is based on the market values, which itself is volatile. In case there are prolonged bear market phases, the amount required to be invested will be much higher. The point to be kept in mind is that if a bear phase continues, let's say for 3-4 years, it can be value eroding for an investor. He will continue investing in a falling market.

In case of bull phases, the incremental investments to be made will be smaller. So, in case one expects a cash crunch, it is advisable to fix a lower target rather than go aggressive and fix a higher target. Usually, in the long term, a VIP is expected to give better returns than a SIP. This is mainly because investments are automatically triggered as the markets fall. The basic premise is that money is invested in periodic intervals in a portfolio in such a manner that the portfolio tries to approach a target rate of return.

Source: http://articles.economictimes.indiatimes.com/2011-09-04/news/30112692_1_investment-plan-new-investment-option-investment-pattern

All that you want to know about - Alpha & Beta

Alpha and Beta are terms that come up often in discussions on investments. Yogita Loke explains you the significance of two vital terms

What is Alpha & Beta?
Alpha indicates the excess return of the fund above risk adjusted market return, given its level of risk as measured by Beta. The excess return of the fund over its benchmark index is a fund’s Alpha.

Beta is the measure of the volatility of a security or a portfolio as compared to the market as a whole. It is also known as beta coefficient.

What do both signify to the investors?
An investment with a positive Alpha indicates that the fund has performed better than its benchmark and a negative Alpha indicates that the fund has underperformed its benchmark.
A Beta of one indicates that the volatility of the portfolio will reflect the market volatility exactly. A Beta of less than one indicates that the volatility of portfolio is less than the market volatility while a Beta of more than one signifies that the volatility of portfolio is greater than the market.

For example, if a stock's Beta is 1.2, theoretically it means that the stock is 20 per cent more volatile than the market.

Why these ratios are considered important?

Alpha value is important to your investor because it measures the excess returns a fund has generated in relation to the returns generated by its benchmark. Alpha is used to determine whether the fund manager through his stock selection ability has been able to beat the market.

Beta value gives you an idea of how a fund will move in relation to the market volatility. In simple words, it is a statistical measure that shows how sensitive a fund is to the market movements. If the Sensex moves up by 10 per cent, a fund's Beta number will help your investor to gauge the fund's movement in relation to the sensex.

Source: http://cafemutual.com/News/InnerKnowledge.aspx?srno=57&MainType=Tutorials&id=5

MFs step up buying

Mutual funds (MFs) bought shares worth a net Rs 266.20 crore on Tuesday, 30 August 2011, compared with an inflow of Rs 49 crore on Monday, 29 August 2011.

The net inflow of Rs 266.20 crore on 30 August 2011 was a result of gross purchases Rs 752.50 crore and gross sales Rs 486.30 crore. The BSE Sensex had jumped 260.42 points or 1.59% to settle at 16,676.75 on that day, its highest closing level since 17 August 2011.

Mutual funds have bought shares worth a net Rs 2523.90 crore in August 2011. They had bought stocks worth a net Rs 652.20 crore last month.

Source: http://www.adityabirlamoney.com/news/504037/10/22,24/Mutual-Funds-Reports/MFs-step-up-buying

L&T Mutual Fund CEO Sinha quits

The chief executive officer (CEO) of India's L&T Mutual Fund, Sanjay Sinha, has resigned from the firm, according to two people with direct knowledge of the matter.

Sinha's exit follows other recent top level exits from the asset management company.

Earlier this year, Chief Marketing Officer Mohit Sachdev, currently CEO at SREI MF Asset Management, had quit.

Anish Shah, who was vice president for finance and operations, had also left L&T Mutual Fund last year to join Deutsche Bank.

Sinha, who is widely quoted in Indian media, and L&T Mutual Fund, both declined to comment.

Sinha previously headed DBS Cholamandalam AMC, which was acquired by L&T Finance in September 2009 and renamed L&T Mutual Fund.

L&T Mutual Fund managed assets of 52.14 billion rupee($1.13 billion) as of June 30, 2011, as per industry data.

Source: http://www.financialexpress.com/news/l&t-mutual-fund-ceo-sinha-quits-sources/839288/

Short-term funds can give better returns than FDs

Most investors associate mutual funds with longterm investing, which is true for most cases. However, various fund schemes also provide lucrative short-term investment options. Some of these include liquid funds, ultra short-term funds and income funds, which invest in call money market and debt instruments, such as government securities, treasury bills, certificates of deposit, commercial papers and corporate debt papers.

"Currently, investments in short-term debt funds are lucrative as the interest rates on short-term government issues are higher than long-term rates," says Yadnesh Chavan, fund manager, fixed income, Mirae Asset Global Investments. According to Bloomberg, the spread between 10-year (8.2%) and one-year (8.17%) gilt papers shrunk to around .03% on 10 August against a 1.41% difference a year ago. This is due to the steady increase in prime lending rates by the RBI (11 times in the past 16 months) and the resulting tight liquidity as well as strained government finances.

BETTER THAN FDS:

If you want to invest for periods ranging from one month to two years, short-term mutual funds are a better investment choice than bank fixed deposits (FDs). "Usually, FDs don't offer a very high return for a short tenure. Top funds, on the other hand, can give returns of 8-9% a year for a short period of 1-6 months," says Ashwinder Singh, head, wealth management, Fullerton Securities & Wealth Advisors. The funds provide better returns as they can churn their portfolios and invest in different types of financial securities that have varying maturity periods.

Such funds are also more liquid as their exit load is usually nil or lower than the penalty imposed on premature withdrawal for FDs, which is 1-2%. Besides, short-term mutual funds are also more tax-efficient than FDs, at least till the Direct Taxes Code (DTC) comes into effect from 1 April 2012. While proceeds from FDs are added to one's salary and taxed according to the income tax slabs, in the growth option of debt funds, only short-term capital gains are taxed as per the tax slab. Long-term capital gains are taxed either at 10% (with indexation) or 20% (without indexation). "The dividend option yields even better returns," says Jayant Pai, vice-president, Parag Parikh Financial Advisory Services.

However, if you invest in a mutual fund now, it will probably mature after 1 April 2012. Under the DTC, there will be no distinction between long-term and short-term capital gains of non-equity mutual funds. The capital gain will be added to the income of the investor and taxed according to the applicable tax slabs.

HOW TO SELECT A FUND

While choosing a fund, the most important factor you must look for is the credit rating of the debt instruments in which these funds are parking their corpus. This is even more important in case of fund types that have a relatively long-term focus as these tend to invest in instruments which are more risky. Another fundamental to be considered is the expense ratio of the fund, which should be below the category average.

"The nominal returns from such funds are usually in single digits, so any saving on the expense front is welcome," says Pai. Financial advisers also recommend choosing a scheme where the assets under management are in line with or higher than the category average. "It will ensure that sudden redemptions don't have a huge impact on the cost of the scheme," says Pai.

Investors must also take into account the interest rate risks of the fund. The interest rate risk of a bond portfolio largely depends on the maturity profile of the fund. The longer the maturity, the higher is the rate risk. The overall interest rate environment is a good guidance to the way bond prices will move. "If interest rates are expected to go up, it's better to invest in funds with the shortest maturity tenure," says Chavan.

TYPES OF FUNDS

Here's a look at the different types of short-term funds that you can pick depending on your investment horizon and risk profile.

Liquid funds:

Investors with a time horizon of 3-6 months can consider liquid funds as these invest in debt instruments with a maximum maturity of 91 days. "The funds are also good to initiate systematic transfer plans as the exit loads are usually nil," says Pai. So, liquid funds can be used to deal with equity market volatility and augment one's returns.

These funds can provide you with better returns compared with those from savings account and also offer the benefit of averaging. They have low interest rate and credit risk as the funds invest in securities with shorter maturity periods that are highly rated.

Ultra short-term funds:

These invest in debt securities that mature within a year. "You may suffer a loss if you want to exit these funds within a month or so," says Pai. However, Singh believes that if an investor can tolerate volatility, these funds can turn out to be good options for parking surplus cash even for a day or up to three months.

Ultra short-term funds give higher returns and are more risky compared with liquid funds as they invest in instruments with longer maturity periods. They also have an advantage over liquid funds due to the differential dividend tax treatment. The dividend declared by an ultra short-term scheme is taxed at 12.87%, while that by a liquid fund is taxed at 25.75%. "In terms of tax benefit, it is definitely better for investors, whose incomes fall in the higher tax slabs, to invest in the dividend option," says Chavan.

Short-term funds:

These funds invest in debt securities with over one year maturity and their interest rate risk is low to moderate, depending on the maturity profile of the fund. Experts recommend these funds for an investment horizon of 18 months or up to two years. Exiting the fund at an early stage may lead to losses as these impose loads for longer periods. Such funds also choose debt instruments that have a maturity of less than a year, but financial advisers warn against such schemes. "If a fund is overweight in such short-term instruments, its average residual maturity falls below one year and the purpose of investing in a short-term fund is defeated," says Pai.

Income funds:

These are good for investors who want regular and steady income. "They help to diversify your portfolio and modulate the ups and downs of equity investments," says Singh. Income funds offer relatively high returns compared to the above three categories but are also prone to higher interest rate risk. "Invest in these funds if your horizon is beyond two years as it will help in moderating the volatility," says Pai. "These funds provide superior returns when the interest rate cycle reverses and the rates start coming down," says Chavan.

Gilt short-term funds:

These funds invest in different medium- and long-term government securities. "These are most suitable for people who want to invest in safe instruments that have zero default risk," says Singh. "Their net asset values (NAVs) rise sharply (double-digit returns are common) in a falling rate regime," says Pai. However, capital loss can occur in a rising rate regime as bond prices share an inverse relationship with interest rates and these funds usually have one of the highest residual maturities. "These funds deliver flat to negative NAV returns in a rising interest rate environment," says Chavan.

http://articles.economictimes.indiatimes.com/2011-08-29/news/29941456_1_debt-funds-mutual-funds-mirae-asset-global-investments/3

CRISIL launches Gold Index

CRISIL Research today announced the launch of the CRISIL Gold Index. The index will track the performance of gold prices in the domestic market. The objective of CRISIL Gold index is to provide an independent and relevant benchmark for performance evaluation of investment products with gold as underlying investment. This is the first index introduced by CRISIL in the commodities space and the ninth overall.

Since the global credit crisis of 2008, gold has been consistently outperforming the equity market and eliciting enhanced investor interest. Between August 2008 and July 2011, gold has given an annualized return of 22.91% compared to 9.3% by S&P CNX Nifty. According to Mukesh Agarwal, Senior Director - CRISIL Research, “Gold is considered to be one of the safest havens for investments. Typically, during uncertain times, gold acts as an effective hedge.” The strong performance by gold has also coincided with the introduction of Gold Exchange Traded Funds (Gold ETFs) and Gold Fund of Funds (Gold FoFs) in India. The objective of these funds is to provide returns that closely correspond to the returns delivered by gold as an asset class. While the first Gold ETF in the country was launched in March 2007, the product has gained momentum only over the past two years. The average assets under management (AUM) under this category have grown exponentially from Rs. 0.96 billion in March 2007 to Rs. 60 billion as on June 2011. Currently 11 asset management companies offer 11 Gold ETFs and three Gold FoFs in India. “When compared with holding physical gold, gold ETFs provide investors with various benefits like affordability, guaranteed purity, high liquidity, transparent pricing and low holding cost. These benefits along with the tax advantage make gold ETFs a more efficient way of owning gold,” added Mr. Agarwal. Globally, AUM of Gold ETFs has grown over USD 100 bn as on June 2011 as against USD 14 bn in April 2007.

Gold ETFs in India benchmark their performance to the price of gold on the domestic commodity exchanges or the local bullion market. However, use of different sources for performance comparison results in inconsistency and makes it difficult for investors to compare one ETF with the other. With the growing interest in Gold ETFs, it is important for investors to have a consistent benchmark index that can be used for performance comparison. According to Tarun Bhatia, Director - Capital Markets, “CRISIL Gold Index is an attempt to address this inconsistency and will serve as an independent and common benchmark for evaluating the performance of gold ETFs. The index construction methodology adopted by CRISIL is in line with the valuation guideline prescribed by Securities Exchange Board of India (SEBI) for Gold ETFs.” The CRISIL Gold index has a base date of 02 January, 2007 and is based on the landed price of 10 grams of gold in Mumbai.

Source: http://www.adityabirlamoney.com/news/503231/10/22,24/Mutual-Funds-Reports/CRISIL-launches-Gold-Index

Time to look at longterm bond funds

With equity markets and equity mutual fund (MF) schemes taking a breather from the global turmoil that impacted India in the past month, the action is slowly turning to the debt market. Long-term bond funds are gearing up for falling interest rates in India. Debt funds do well when interest rates fall as there is an inverse relationship between the two.

Long-term bond funds have increased their duration (ex- pressed in years; the duration tells you how much your debt fund would get affected if in- terest rates--your bond fund's yield--were to move up or down by 1%) and their average maturity or the number of years left for your debt fund's existing scrips to mature (see graph). Already, fund houses are offering potentially-attrac- tive fixed maturity plans (FMPs), while six-month short-term bond fund returns have shot up to about 7-8% per annum during the past six months.

We suggest you take a look at long-term bond funds, even if selectively. Here's why.
Falling interest rates Many fund managers believe that interest rates will soon start falling largely because in- flation is expected to stabilize.
At present, inflation is at 9.22% (as on 31 July). Though it has marginally dropped this year (9.47% at the start of 2011), in- flation is still up from where it was at the start of 2010 (8.68%).

One of the main reasons why fund managers claim inflation will fall is a potential drop in global oil prices. Market esti- mates suggest that almost 70% of India's oil requirements are met through imports. Rising oil prices globally have affected In- dia's imports; in simple words, petrol for our cars and other ve- hicles has become costlier by the day. Higher oil prices also lead to higher food prices be- cause it increases the cost of transportation of food items. To combat rising inflation, the Re- serve Bank of India (RBI) has increased the key interest rate (repo rate or the rate at which banks borrow from RBI) 10 times since April 2010.

But that is largely expected to change. “Crude oil prices globally are expected to cor- rect, especially since the crisis in Libya is expected to be re- solved sooner than later. Once Libya starts to manufacture oil, the supply of oil will increase that is supposed to bring down global oil prices,“ says Sandip Sabharwal, head of portfolio management services, Prabhu- das Lilladher Pvt. Ltd. Add a normal monsoon to that and Sabharwal feels that food infla- tion (food prices) should also come down slightly.

A slowing growth can also be another reason why interest rates could soon start falling.
The growth in credit offtake of companies from the banking system have been moving down over the past one year.
In simple words, companies have been borrowing less. As per data available from RBI, growth in credit (year-on-year) has dropped to 18.5% as on 29 July compared with 20.7% as on 17 June and 24% at the start of the year.

On the contrary, deposits have grown by 17.3% as on 29 July compared with 16.46% at the turn of the year. “A signifi- cant chunk of credit offtake could be because companies are borrowing for their work- ing capital (daily requirement) needs and not long-term ex- pansion or growth. There is a lot of concern about a lot of developed countries, especial- ly after the recent downgrade of the US and the continued turbulence in the euro zone, which could put downward pressure on commodity prices.
Growth is expected to slow down globally which could positively impact the domestic inflation trajectory,“ says Ra- jeev Radhakrishnan, head (debt funds), SBI Funds Man- agement Ltd. Radhakrishnan feels that although RBI may not cut interest rates in the “immediate future“, it may go for “an elongated pause“.

“If companies go slow in their activities and there is lit- tle demand for long-term money for growth and expan- sion, then the banks would in- vest their surplus money, which would otherwise be lent, in long-term bonds and gov- ernment securities, thus bring- ing down interest rates,“ says Ganti N. Murthy, head (fixed income), Peerless Funds Man- agement Co. Ltd.

In other words, falling inter- est rates will be beneficial to bond funds, especially long- term bond funds.
The concerns Apart from inflation that may take its time to come down, fund managers are watching India's fiscal deficit situation. Put it in simple terms, a fiscal deficit is the gap between the government's in- come and expenditure.

“Since the government in- curs a bill in food and fertilizer subsidies, we need to keep a watch on how much it spends and earns this year. Disinvest- ment has not happened to a large extent, so the govern- ment is not going to earn much here as was previously expec- ted,“ says Alok Singh, head (fixed income), BNP Paribas Asset Management (India) Ltd.
What Singh means is that if the government spends more than it earns through its usual means, it will issue govern- ment bonds to raise money.
The additional supply of gov- ernment securities in the mar- ket will bring down the bond prices and push the yields up.

Though inflation is expected to come down, there is no one answer on how soon it will drop. “The non-food manufac- turing inflation is above the comfort zone of RBI and hence we feel that the central bank may wait for this number to come down before pausing,“ says Vikrant Mehta, head (fixed income), AIG Global As- set Management Co. (India) Pvt. Ltd. Same is the case for oil prices, Mehta adds, and it will eventually come down.
Why long-term bond funds make sense?

Although it is anybody's guess when interest rates will actually begin to fall, it makes sense to take a partial expo- sure to long-term bond funds now. Debt funds managers have started advising investors to put money in them already.

With a large chunk of fund managers and bond market ex- perts expecting that interest rates may not go much higher than the present levels, long- term bond funds have started taking exposure to debt scrips with longer tenors.

Dynamic debt schemes that have the flexibility to invest in scrips across maturity periods depending on the fund manag- er's perception of where the in- terest rates can go have in- creased their average maturity periods. For instance, dynamic debt schemes schemes of fund houses, including Reliance Capital AMC, SBI Funds Man- agement and BNP Paribas AMC, have increased their average maturity periods to three to sev- en years, up from just about 10 months to a year of maturity, prevalent in May 2011.

Remember that though long-term bond funds have a duration up to three to even four years, that doesn't mean you should stay invested in them for long. Take strategic positions in them, instead. “In- vestors should avoid staying invested in them for a longer horizon. We are not expecting our economy to slow down very substantially. Bond yields will come down substantially or stay there for very long. In- vest for a time period of one year,“ says Sabharwal.

After the 10-year government security yield touched 8.463%, it has moved within a range.
Short-term funds and FMPs still look good On an average, short-term bond funds have returned 6.50% in the past six months and 5.39% in the past one year. These schemes too have increased their duration slightly--from 267 days on an average as of their April 2011-end portfolio to 350 days as per their July 2011-end portfolio. Says Mahen- dra Jajoo, chief investment offi- cer (fixed income), Pramerica Asset Managers Ltd: “Short-term interest rates are expected to re- main more stable than the long- term interest rates and hence they have made good returns in the past six months. They look good going ahead too.“ What to do If you wish to take a bit of risk for the chance of getting higher returns, go for long- term bond funds. Since these funds are marked to market and are open-ended, any fall in interest rates will benefit them (the prices of the underlying securities will rise; the inverse relationship of interest rates and scrip prices at play here).

Apply the same logic for short-term funds. Adds Rad- hakrishnan: “Short-term funds are marked to market but are subject to lower volatility be- cause their duration is limited (lower than those of long-term bond funds). But if you do not have a risk appetite and do not wish to risk your capital, go for FMPs.“

Watch out for exit loads: If you invest in an FMP, your money gets locked till the scheme matures. If you think you may need your money ear- lier, go for short-term bond funds. Apart from being open- ended, they also give more re- turns if interest rates start to fall. But most short-term bond funds impose an exit load for withdrawals before 180 days.

Long-term bond funds too, impose exit loads for early withdrawals before 90 days, going up to 365 days.

Source: http://epaper.livemint.com/ArticleImage.aspx?article=30_08_2011_020_001&mode=1