Your queries: Mutual Funds – Invest in target maturity funds of 3-5 years duration now | The Financial Express

Your queries: Mutual Funds – Invest in target maturity funds of 3-5 years duration now

The remainder can be allocated to short-term funds.

Your queries: Mutual Funds – Invest in target maturity funds of 3-5 years duration now
Accordingly, focused and sectoral funds should be considered by investors with a high risk appetite and a long term investment horizon (5-7 years, particularly for focused funds).

With interest rates likely to rise further, should I invest in low duration funds now?
—Sanjay Kumar Rana

Over the past six to nine months, interest rates have seen a sharp upswing particularly since RBI initiated its rate hike cycle earlier this year. The RBI has hiked the repo rate by 190 bps (or 1.90%) cumulatively, resulting in short term interest rates (such as on one-year Treasury bills, CDs, etc.) moving up by 200 to 250 bps. Similarly, yields on longer dated government securities and AAA rated bonds have risen by 80 to 100 bps during this period. Given that inflation has seen a downtick recently, although it remains above RBI’s target range, further interest rate increases may be muted. Accordingly, going ahead, bond yields across the maturity spectrum (short to long term) may not witness sharp upswings from current levels. Bond yields at the mid to long duration segment (five- to 10-year) are looking attractive and one can invest a portion (30-40%) of their debt allocation into this segment via target maturity funds with an investment horizon of three to five years. The remainder can be allocated to short-term funds.

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As I have exposure in large-cap funds, should I diversify into focused or sectoral funds?
—Alok Ranjan

Focused funds typically hold concentrated portfolios consisting of around 25 stocks vs diversified equity funds including large-cap funds, which hold in excess of 40 stocks. Due to this, focused funds could witness greater volatility in returns and periods of over / underperformance vs large cap funds. The performance of sectoral funds is entirely linked to the prospects and performance of that sector. Performance of various sectors tends to be cyclical and can vary significantly across different sectors, resulting in higher volatility in sectoral funds. Due to the cyclical nature of sectoral performance, one needs to have a clear view on the sector and may need to time one’s entry and exit well. Accordingly, focused and sectoral funds should be considered by investors with a high risk appetite and a long term investment horizon (5-7 years, particularly for focused funds).

I want to invest some money in liquid funds. What should be the ideal holding period to get optimal returns and what should I do once the period is over?
—Sushil Chawla

Liquid funds hold securities with maturities up to three months. Liquid funds are meant for short term (normally up to 3 to 6 months) parking of surpluses and returns are aligned to prevailing yields on short term instruments. As the duration is low, there’s minimal interest rate risk in such funds. As these are open ended funds, one can stay invested and redeem as required. In case your holding period exceeds six months, you can invest in ultra short term funds or other debt funds based on the investment horizon. The yields on these fund categories would tend to be higher than liquid with higher interest rate risk based on the portfolio duration.

The writer is director, Investment Advisory, Morningstar Investment Adviser (India). Send your queries to fepersonalfinance@expressindia.com

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First published on: 28-11-2022 at 00:30 IST