Bondman Returns: Revenge of the yields (via Market Gup Shup)

2010 could as well go down as the year of debt markets in India. For investors in debt instruments it would be akin to being part of the Akshay Kumar’s reality TV show “Khatron Ke Khiladi” which started to be aired sometime ago. Or better still it could also be like watching the latest Hollywood Super hero flick in which our Super hero toils against the evil powers throughout 80% of the screen time but in the last 20% part of the movie we get thrilled with the climax which more than compensates our waiting time to get to this part of the movie. Our Super hero has the last laugh and not before he awes us with the kind of fire power only he could manage, making the evil powers look meek and without any iota of class.

So where’s the connect, you might ask?

For people who are used to making 2+2=5 you could skip because any amount of persuasion is not going to suffice. However, for those like me and who like to keep the game fairly simple, read on.

The above situation or parallel is likely being played in the bond markets in India currently. Rising yields are back with a vengeance. They are bleeding portfolios and investors are scurrying for cover. There is blood on the portfolio statement of an average debt investor. The last few months have been a double whammy. For one, there was low return on traditional instruments like bank FD’s. Second, debt mutual funds offered returns with commensurate higher risk but ended up hurting as risk free rate inched up higher due to higher borrowing and resultant inflation. Third and last, there were only liquid funds that offered hope, but investor’s patience waned as the situation persisted for long.

Come 2010, and there was more bad news. The evil forces of yields are back to their menacing best. Rising fast, staying there, declining and trying to tell us they are going away and striking back when we think it is a good time to invest and make money.

So what does a pre-dominantly debt investor do after being subject to such a mauling over a relatively short period?

We believe that it could be a best time to invest in debt funds over the next couple of years. We also believe that this would be a golden period for debt funds, a period which one witnesses in 5-7 years. The last time this happened was in 2002-2003. Annual returns from medium term debt funds could average 8-12% on a gross basis for the next 18-24 months.

In light of this, we think it would be a good strategy to forget the red ink on your current debt portfolio statement (if you have a reasonable debt portfolio already). But if you are not a debt investor, then we think its winter in India and a good time to hit the beach in Goa.

Invest sizeable amounts of money in a staggered manner in star rated Income funds and wait till our Super hero – the Bondman (as we prefer to call him) vanquish the menacing yields and prevail upon them. The movie is still reaching the interval and the climax is set up for the end of 2010.