“Time to switch to Accrual Funds from Duration”
Dear Friends,
A brief Synopsis of what has happened in the past:
Since Jan’2015, RBI has reduced interest rates to the tune of 150 basis points. Going forward, the interest rates are bound to soften further. But looking on to the current bond prices, I believe that the prices have already factored in another 50 basis point interest rate reduction.
I do not foresee a very aggressive interest rate reduction, beyond this 50 basis point, in the next 12 months’ time.
As such, it would be wise and prudent for investors to switch from Duration funds to Accrual funds in debt. This move would ensure that the investor gets 8% + return on a very conservative side on an annualized basis.
I would be open for any feedback or suggestions.
With warm regards,
Samrendra Tibarewalla, CFPCM
PS: You are the best manager of your money. Please take informed decisions only.
Disclaimer : The author in no way will be held responsible for losses incurred on the basis of above recommendations. The investors are advised to take independent decisions after verifying all facts.
FAQ: Switching to Accrual Funds from Duration Funds
1. What have been the RBI’s actions on interest rates since January 2015?
Since January 2015, the Reserve Bank of India (RBI) has reduced interest rates by a total of 150 basis points, signaling a trend towards easing the monetary policy to support economic growth.
2. What are the expected returns for investors switching to Accrual funds?
Investors making the switch to Accrual funds can expect a conservative annualized return of over 8%, which is deemed prudent given the current economic and financial market conditions.
3. What does the term “Duration funds” refer to?
Duration funds are a type of debt fund that invests in bonds and securities with the aim of capitalizing on interest rate movements. They are sensitive to changes in interest rates, with their value typically increasing as interest rates decline.
4. What are “Accrual funds,” and how do they differ from Duration funds?
Accrual funds focus on earning interest income from their holdings over time rather than capital gains from trading. They invest in bonds and securities with the aim of holding them until maturity, making them less sensitive to immediate interest rate fluctuations compared to Duration funds.