Bond investors have been hit hard over the past one-and-a-half year. For those in fixed deposits, the interest rates have been low and bond fund investors have been worried due to tepid returns on account of rising bond yields. While ICRA predicts record retail bond issuance, experts ask investors to be selective in their fixed income investments to enhance risk adjusted returns.
“Our preferred strategy remains corporate credit, with exposure to both accrual and credit opportunity strategies,” Sunil Sharma, Chief Investment Officer, Sanctum Wealth Management, wrote in a recent investment strategy note. The note mentions slight preference for bonds on valuation concerns over stocks.
Why are investors worried?
Investors saw the 10-year benchmark bond yield move up to 7.83 percent from a low of 6.18 percent recorded on December 7, 2016. Interest rates on bank fixed deposits too have started climbing up. On May 28, State Bank of India, India's largest public sector bank, raised interest rates on fixed deposits by up to 20 basis points. (100 basis points make one percentage point).
Though the Reserve Bank of India has kept policy rates unchanged so far, expectations of a rate hike in the near term are rising. A recent report from HSBC Global Research sees two policy rate hikes of 25 basis points each in 2018. The possibility of a rate hike comes in the background of an anticipated spike in inflation, rising interest rates in the US and possibility of accelerated economic growth in the Indian economy. That calls for a review of your bond portfolio.