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Bond Funds Look Good But.... |
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Bond Funds have appeared attractive over the last few weeks and have also shown a brilliant performance. However is it a good idea to look at bond funds that hold largely corporate paper? My personal feeling is that there is still a significant risk in the corporate debt market and one should consider only bond funds that hold government and PSU paper. |
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Re: Bond Funds Look Good But.... |
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Dear Saurabh,
Although I agree with you but don't be so pessimistic all is not lost. Any how can you think from where the Govt will bring money to compensate for losses of its follies. High Inflation ? |
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Bond Funds V/s gilt funds |
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Kalsi
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| 18 December 2008, 19:06:18 |
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Hi Parmod,
Its the not the question of being pessimist but do consider expected qtrly results of most of corporates for Dec08.They point towards falling profits,stressful enviornment to raise debt and hence rising corporate bond yields.If the G-sec yields continue to fall the way they've been falling - we'll end up with spreads b/w G-Secs and corporate bonds expanding instead of compressing ???
...it may lead to Bond funds with large allocation to corporate bonds giving negative returns ??!!
Even with the bond funds carrying PSU bonds we run into liquidity risk -hope we've not forgotten the Liquid funds crisis in Oct08.
I think at this point of time it makes more sense to do a portfolio allocation in debt funds - larger allocation to GILT funds and remaining allocation to Bond/income funds.
Don't you think that GILT funds are like "large caps of Debt" while Bond/Income funds are "mid-caps of debt" |
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Re: Bond Funds Look Good But.... |
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Amal
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| 18 January 2009, 21:56:39 |
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Friends my understanding out of the above situation is of mixed nature. Some unrelated factors getting mixed up and a different picture immerging.
A few quarters of negative performance is normal in business cycles so one has to go thru this periods. Alibit low profits do become a part of the out come. But while a bond is being valued there are lot of factors that go into valuating the bond. they are
A) The credibility of the issuing corporate.
b) The rate of coupon
c) the discounting factor
d) the Duration of the paper
While in the investing side we will have a portfolio of n number of papers creating the port folio which will give rise to a different dynamic situation including the above.
Now if the condition is invest and hold to maturity there should be no problem with the yield part of it.
but if the security has to be actively traded then the question is how the current interest rate prevailing in the markets this will give rise to the volatilaty in the prices/ valuation and this is what one should be looking at with the interest rated expected to go down a moderate out performance is bound to happen. So some one with a 1-1 1/2 year horizon should be able to look at above par return in debt category. Most important aspect will be post tax returns these may not look all that good. |
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