As India is probably at the end of the rate cut cycle and movement of interest rate in the economy impacts bond price substantially, investors should be cautious while taking a dig in the Indian bond market. Today, after rising inflation and uncertainty with respect to growth were feared in RBI's minutes, 10-year bond yield spiked to 17-month high of 7.26%, up from Wednesday's close of 7.219%.
Early this week on Monday, the bond yields rose to levels of 7.22% as Finance Minister moved second batch of grants for parliamentary approval for the FY 2017-18.
Interest rate, Bond prices and Bond yield
Bond prices and interest rate share an inverse relationship and with rise in interest rates, bond prices decline as investors now look for other rewarding bonds and hence with lower demand, price of earlier bonds take a hit. So, in the current scenario, when the interest rates may have probably bottomed out and amid rising inflation which for the month of November well spiked above the RBI's target of 4%, rates can again go up.
What investors in Indian bond market should do?
Investors who can afford a certain degree of market volatility and risk do look for other investment avenues with better yields and here is where equity and bond markets come into picture. In the current situation, investors shall be better off by avoiding long-term debt funds as they react more aggressively to changes in interest rate in the economy. This way you will safeguard yourself from interest rate risk.
So, at this point in time you can choose short-term income funds which invest in debt securities with maturity of 3-4 years. And the other option that you can for in debt funds category is short term PSU and banking debt funds.