Bond Funds are yielding over 20 per cent, should you invest now?
The 10-year government bond yield is currently trading at a level we saw during the ‘demonetisation’ of year 2016. The bond yields are down by 100 basis points since the start of the financial year. What led to such fall is a confluence of events such rate cuts by RBI, government’s proposal to raise part of its gross borrowing programme in foreign currencies and finally the drop in the wholesale price index (WPI). This has raised the hopes for reduction of the key policy rates further. The 10-year bond yield dropped to 6.33 per cent on July 16, 2019.
The impact of such a fall in the bond yield is reflected in the bond funds especially the long duration and gilt funds. All the funds in this category have given return in double digit compared to mid-cap and small-cap funds giving negative returns.
| | Trailing Return in (%) |
| Fund Category | One Week | One Month | 3 Month | One Year |
| Long Duration | 1.8 | 5.48 | 11.63 | 21.6 |
| Gilt | 1.35 | 3.83 | 8.06 | 15.75 |
| Sectoral-Banking | -0.01 | 0.24 | 1.07 | 12.74 |
| Dynamic Bond | 0.83 | 2.36 | 3.75 | 10.08 |
| Liquid | 0.12 | 0.53 | 1.67 | 6.86 |
The table clearly shows that Debt funds have clearly outperformed the Equity funds.
Fall in the bond yield has been a global phenomenon. Around the world economies are slowing down and central banks are once again playing a major role in this. In Europe, the Federal Reserve and European Central Bank has hinted towards loosening monetary policy instead of tightening it. Even the US Fed has signalled a possible cut in the policy rates in the months ahead.
The days of super returns are over for bond funds and hence you should not join the bandwagon now. One of the thumb rule to apply while investing in bond funds is to check its yield if it is above long term average you can enter otherwise it is not advisable to take fresh positions, until and unless it fits into some of your financial goals.