I fully agree to your theory , which is very practical.
Investing in debts for less than 5 years is real pain in the xxx. and very risky.
I have nil investment in Debts and am fully invested in equity. And I am nearing 70 
I keep an eye on the debts markets as part of my investment thought process.
Debt markets have huge influence on all other markets.
2 Likes
i anyway invest piecemeal and not in lumpsum one time or SIP
Hi guys,
Just wanted to update.
Indian government is taking some aggressive steps to control inflation. Next year the elections are around and I feel they might still take 2 or 3 more major steps to control inflation.
- Petrol prices have been reduced by around 9 Rs and diesel prices have been reduced by around 7 Rs. This is a big step taken by Government of India. This is going to have a major impact on inflation. Would suggest you to go through some articles on this topic.
2.Export duty hike on steal products. The price of steel related products in the domestic market will start cooling down. The reason is that these Exporters will not have any incentive to export steel products sue to heavy increase in export duty. They will start catering the domestic market which would thus reduce the price.
-
Recent rate hike of around 40bps and another rate hike which is likely to happen within a month. These two rate hike will have major impact on reducing inflation.
-
Wheat export ban. Wheat price are trading at all time high and this step would also have a major impact in reducing the domestic price of wheat.
I still feel another 2 to 3 more steps would be taken. The inflation will start stabilizing or might even come down in next 2 to 4 months.
Overall summing up all of this I feel this is the right opportunity if you want to enter the bond market. The bond prices will slowly start going up. Current bond prices can be a decent entry point. If you are an aggressive player you can go for 70% at this price and if you are a conservative player then you can go for 50%.
5 Likes
MAS Financials bond coupon rate 10.75%
is 221 days old should have given 6.5% interest so far.
But, is trading only at 4700 premium.
Is this because of rate hike?
If a person is in 30% tax bracket bond may not make lot of sense as post tax he would make 5.5 % return . It’s a good substitute for bank f.d .
I feel rate hikes are mostly priced in and there may be 20-50 bps upside pricing left in bonds.
Most of private companies listed bonds like hdfc icici trade some where close to 7 % Yield .
New bonds coming up will offer a better yield.
Also keep in mind most of bonds which have high yield come with 10 year or so maturity hence the higher yield
Disc - Views are personal
Hi thankyou for your views.
If a person is in 30% tax bracket then he pays the same % of tax on FD and bond interest earnings. I am not very good at tax so might be wrong here. Just scroll through this thread people have discussed about TAX. So bond and FD are taxed as per your tax slab. When I say bond it is only the interest you get.
Secondly this topic was made when the 10 yrs bond was at a 7.3% of yield and made a high of 7.6% there after it made a low of 7.1% and currently at 7.3%. My overall view here was that in the next 2yrs they are bound to go below their coupon rate unless there is another war. So in the short term they might go up. If you see are CPI inflation has been falling from last 2 months and this time there was another 50bps hike. I am not an economist but I feel is that the yield might not go above 7.8% 20bps high from previous high. So if you entered at 7.45% or 7.5% then you are at a good position.
The biggest benefit here is that you will end up with capital gains unlike in FD. We were at 8yrs high inflation such situation comes once in a decade. So such yield also comes once in a decade. In the next 2 yrs you might end up with good capital gains here and interest as well. The good part is they are tradable in market unlike FD so you can sell them as well.
This place can be further explored. Like you can buy debentures of companies with stable performance where there is not much growth. Like the companies whose earnings are flat. Why because earnings being flat does not mean it is a bad company but these companies issue debentures at 13% or 15%. So you know that the company cannot go bankrupt moreover because of flattish earnings you get higher yield.
So investing 15 to 20% of your portfolio and making 10% to 15% interest is a good idea. So making 10 to 15% let say for 10yrs consistently on 15 to 20% of your portfolio is decent.
@jamit05
I have not understood the question if you could elaborate a bit then I hope so I would be in a position to answer.
Yes to a great extent. It can also mean market participants see more risk than what they saw at time of initial offer. Both will depress bond prices.
1 Like
Once you buy any bond, interest rates remain fixed till maturity. Any interest rate variations are captured in change in yield which impacts buying and selling price of bonds in markets.
Also note that in the example shared, there is an annual payment only and it will be paid to all bond holders on record date. Record date is around 20 days before interest payment.
1 Like
Hello All,
Will it be good idea to use NPS tier2 account with 100%gsec allocation to invest in gov bonds.
I am refffering lic gsec chart LIC Pension Fund - Scheme G - TIER II: NAV – 24.223, NPS Growth Chart - The Economic Times
@ISHWAR Sir, please share your view on this.
Thanks,
Jatin Parekh
@Jatin_Parekh
Actually I have no experience in buying or selling bonds till date so I am not the right person to answer this. There is one more topic in this forum platform to invests in bond just put this question there I hope you will get your answer.
I have bought T-bills through RBI retail direct. It’s very easy to register and buy. G-Secs can be similarly bought. I am buying T-bills because 364 day T-Bill is yielding better returns than bank FDs. And I am not investing from trading point of view. Please appreciate two things about any fixed income security - concept of duration and liquidity. If you are sure about those then and only then think about trading in bond markets.
2 Likes
It’s about 6.84%, some banks like CUB offer higher rates than this.
You may be right. The T-Bill yield has come down - was close to 6.98% during one of the auctions. Also, if you look around there will be banks offering better rates and some AAA/ AA rated NBFCs also. I don’t like to open too many accounts with banks so happy with my existing bank and investing elsewhere whenever I find it convenient.
Hi guys,
Since @Atharva raised the point of duration and liquidity so I would love to explain this.
I will be simplifying things but please note bond market is dynamic and all the explanation below is just to give a basic understanding.
Before starting we will assume the inflation should be equal to coupon rate for bond to trade at par and bonds price exabit linear relationship with change in inflation.
Eg: If inflation goes up by 10bps bond price will fall by 1rs per 100, so a 20bps hike will be 2rs fall per hundred (LINEAR MOVEMENT).
In my above post what I was referring to YTM is called simple yield. Simple yield does not account for compounding and coupon reinvestment.
YTM is the discount rate at which the NPV of coupon payment and principle repayment will be 0. It is same as IRR.
Eg. 10yrs maturity,6% coupon, annual payment and CMP of 90 will give us a simple yeild of 7.77% but YTM of 7.45%.
This YTM means that if inflation stays stable you will make a 7.45% CAGR on your investment(assuming you reinvest your interest)
when interest rates go up you reinvest you coupon at a higher rate but you suffer a notional loss on your bond value.(Bond price go down when interest rates go up)
So the capital loss > than the benefit of bond reinvestement at higher rates. Hence you YTM fall when rates go up.
When interest rates go down you reinvest your coupon at a lower rate but you have a notional profit. So you capital gain here is > than reinvestment loss. hence YTM goes up
Now what if I say after a specific year the reinvestment risk is > than capital loss/profit.
After a certain year if interest rates go up your reinvestment profit > than capital loss(vice versa). Hence YTM increases despite interest rate hike.
This entire concept is known as macaulay duration. Eg: if your macaulay duration is 5yrs this means before 5yrs capital gain/loss is dominent and after 5yrs reinvestment is dominent.
The second concept is modified duration. This measures the %change in bond price per 100bps change in YTM.
Why I explained all this?
Suppose you bought a 90rs bond,6% coupon,10yrs maturity, annual payment, YTM of 7.45% with macaulay duration of 5 and modified duration of 4.65.
Now if you are expecting inflation to fall by 100bps you know your bond will appreciate by 4.65% and you also know this has to happen before 5yrs because after that you eventually start loosing money despite capital appreciation.
When I made this post inflation was at 8yrs high. This means Once in 8yrs opportunity. Inflation as per me was bound to go below 6% in 2yrs. So eventually you end up making 11% to 12% kind of return. So instead of FD this was a way way attractive opportunity.
Your compute your returns after adjusting for the risk you take ,but in this case government bonds is risk free so theoretically 11% to 12% is you risk adjusted return.
Now bondholder’s have a prior claim than shareholder. We can also invest in corporate bonds of PSU which are trading at a YTM of 10% to 12%. With capital gain you can make more than this but here you have LIQUIDITY RISK which is not the case with GOI bonds. So If you can do some research and find good active corporate bonds you can make decent returns.
Bond is very dynamic and it is not so simple as I explainded. Instutions purchase extremely expencive softwares for trading in bonds becasue they benfit for it. For retailers it does not make sensec to purchase those software hence their participation is low.
4 Likes
I was trying to compare buying GOI bonds directly versus buying Gilt mutual funds. If I am planning to hold for at least 3 years, the taxation of Gilt funds is much more favourable (20% after indexation). Also, Gilt MF provide a much better liquidity than the direct bonds.
Does this make sense, or is there any benefit to buying GOI bonds directly that I am missing?
1 Like
Only negative may be small fund management charges impacting the returns. But good fund managers may be able to create alpha by opportunistic trading of bonds.
Other negative is that short term returns will show volatility due to interest rate fluctuations.
is a good source to understand debt MFs
2 Likes
Also, I am trying to understand how the constant maturity Gilt MF works, such as ICICI Prudential Constant Maturity Gilt Fund, Debt Funds | Mutual Funds
This currently holds a single GOI bond of 10 year maturity, and their objective is to always maintain a 10 year maturity.
I am wondering how they maintain the constant maturity!! Do they sell the entire holding every year and replace them by fresh 10 year GOI bond? If so, is there enough liquidity to be able to sell the entire holding every year?
1 Like
Don’t go by what they say in the page, as funds have SIDs, in the SID they have mentioned this.
However, there can be no assurance or guarantee that the investment objective of the Scheme would be achieved.
And VR website mentions about Macaulay duration of the fund, which the fund also mentions in the SID, so I guess the other small investments are also to be considered while arriving at the maturity.
And you can also look at this to have more understanding.
I have no interest in gilts, I use debt funds.
after the franklin debt fiasco, I am wary of debt funds in general. with gilt funds, at least there is no risk to the principal since it only invests in sovereign bonds. and if you hold till maturity, even interest rate risk can be ignored.