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Ask Us Why do fund managers increase the maturity of paper?

Why do fund managers increase the maturity of paper?

Fund managers adjust the duration of portfolio by taking a call on the direction of interest rate movements.
Team Cafemutual Jul 6, 2015

Why and in what scenario do fund managers increase the maturity of papers?

Bond prices and interest rates have an inverse relationship. When interest rates are expected to fall, fund managers typically look for paper with higher maturity in order to lock in high yields. On the contrary, when interest rates are expected to rise, fund managers invest in paper which come with shorter maturity offering higher yield. Thus, fund managers adjust the duration of portfolio by taking a call on the direction of interest rate movements.

Typically, long term bond funds and gilt funds invest in long term paper having higher maturity while short term funds like liquid and ultra-short term funds invest in paper having shorter maturity.

 

In the current scenario in which debt fund do you recommend to invest and why?

It would depend on the time horizon and the risk appetite of your client.

If the time horizon is 6-12 months, it is advisable to invest in ultra-short term funds or liquid funds. Investing in gilt funds and long duration bond funds would be ideal to get better tax adjusted returns if the time horizon is more than three years. However, gilt funds are risky as they are prone to interest rate risk. A fall in interest rates bodes well for gilt funds as the prices of government securities go up which leads to higher returns. However, gilt funds are generally meant for savvy investors.

Alternatively, if your client is risk averse and he/she is looking for better than bank fixed deposit returns, you can recommend short term bond fund or medium term bond fund for an investment horizon of three years.

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