supply of short-term bonds and reducing supply of long-term bonds (original version belonged to the US Fed) on August 21, 2013.
This shows that the recovery can be faster than the fall, if you hold on. If somebody had booked losses and shifted to ‘safety’ on Aug 19, 2013, it would have taken much longer to recover the losses. Liquid funds or bank deposits, at their prevailing yields will need approximately four months to recover a notional loss of, say, 3%, something that was done precisely in two days by bond funds. Periods like the one seen since July 15, 2013, are rare. The last time it happened was in 1998 during the Asian currency crisis and lasted for about two months. For the record, in the last six years since May 2007, 10-year g-sec yields have traded above the 8.5% mark for only 9.2% of the time. And in each case when they went above 8.5%, yields fell back below the level within three months from the date of such breach.
What should an investor do?
There would be two kinds of investors at present — those who are already invested in debt funds (majority I believe) and those who are on sidelines and holding cash (a rarity in my opinion). Those who are already invested must hold on, unless you really need the money in the next three months. As shown above, this can be your shortest, though, maybe, more painful, way to recovery.
For onlookers, there is a handsome opportunity in both accrual as well as duration plays. AAA rated bond yields are in double digits, look pretty attractive, and should head lower in the medium term.
However, income fund is not the only manner in which you can benefit from the opportunity. Depending upon your target investment horizon, you can also choose short-term debt funds, high yield accrual funds, corporate bond funds or dynamic bond funds. Most of these funds currently carry double-digit yields (high accrual income) with low durations reducing their sensitivity to interest rate movements.
Capital protection-oriented funds and other closed-ended debt focused hybrid funds that invest 70-80%