Post the subprime mess, the Fed cut the interest rate selectively, more to accommodate market participants at a moment when there was a sudden redemption pressure. The rate-cut in USA seen more as a measure to ensure that there will be enough liquidity in the system. This has made inflation control the secondary objective of central bankers, at least in the short term.

Things are, however, bit different in India. Though there are some hot pockets like real estate, the central bankers are in charge of the economy. The key concern of growing inflation is well addressed, thanks to both a larger base and tight money policy by the central bankers.

The increase in reserve requirements and removal of sealing on auctions ensured that liquidity would be taken care of. It triggered the yield on bonds upwards. The bond funds, especially those with high average maturity, got a good knock. The August numbers connote that assets under management for such schemes felt the heat. Most of the corporate investors preferred to withdraw their money from these funds, as the NAVs showed immediate downward movements.

On the one hand we experience withdrawal from long-dated securities as an investment option but, on the other, there are some savvy investors who are looking at the long-dated securities. Some may think that volatility is the driving factor behind this. Though this cannot be ruled out, there are other factors like signals given by various players in the Indian economy.

Remember the time when commercial banks were knocking on your door with attractive deposit schemes just a couple of months ago? Try calling up your bank for the same deposit scheme and you will realise that most of them have simply revised the rates down or just want to lock your money now for a couple of years instead of just a year. If you are an investor in fixed maturity plans with mutual funds, do check the indicative yields on offer. The yields are also showing southward bias.

The yields that you will earn on fixed income instruments are going down. However, some of you may argue that this may be the case as there is ample liquidity in the market and things may be due for a rebound and it is inevitable. One may not rule out a further tightening of liquidity from the central bankers, and it may amount to a hike in prevailing rates by 25-50 basis points.

But look at the other side of the business. There are further signals from the bankers in India. The PSU bankers like Bank of Baroda and Allahabad Bank have announced a cut in their lending rates. The loan rates have come down marginally around 50-100 basis points on home loans for the new borrowers.

This should be seen as a case of recognition of the fact that demand for money for essentials like housing is not great at the higher end of the interest rates. Though this cut is not going to bring any benefit to the existing borrowers, it has to be seen as a signalling device.

All the factors discussed above indicate a strong case for investing in fixed income securities. Note that the price of the bond is inversely proportional to the prevailing rate of interest. Interest rate sensitivity is higher for bonds having longer duration for maturity and shorter for bonds nearing maturity. So if you are willing to buy the argument that the rates are nearing their peaks and may come down over a couple of years? time, you can consider an exposure to long-dated securities available in the market.

Due to the very nature of the bond markets, mutual funds are the best option to route your investment. You may consider schemes that invest in long-dated securities. While going through a scheme that claims to invest in long dated securities you have to find out the average duration to maturity, average yield of the scheme portfolio, returns history, the expense ratio and loads of the scheme.

The duration to maturity will decide your risk and returns. Higher the time to maturity, higher the risk and higher the rewards. Returns history is an important factor, as you need to check out if the scheme has delivered at least in line with the inflation. There may be times when the schemes have underperformed or even offered negative returns, in line with the market. Average yield of the portfolio denotes how much an investor would generate if he holds the entire portfolio till maturity.

The expense ratio and the loads are equally important. The loads and the expense ratio are the costs you incur as an investor when you invest in a mutual fund. The best of the schemes in this category are barely earning in the vicinity of 10%. Hence you must be careful when it comes to expense ratios and loads of the schemes. Expense ratios in the range of 1-1.5% with no entry and exit loads are the best cases. Though in no case, it is the secondary parameter.

Once you zero in on the schemes that you have in mind, take a ?systematic? exposure to the asset class. The systematic investment plans here add immense value as the commitment is spread over a long period of time and may help you digest any small upward move in interest rates. One last word; the investment is expected to pay off only over the next couple of years. So if your investment horizon is not for three to five years then it is something you should consider.