Visible returns attract investors to roll down strategies | Economic Times

Investors in various debt mutual fund categories have taken a hit on account of the rise in the bond yields in the past few weeks. Long-term debt schemes, dynamic bond funds and Banking and PSU Debt schemes have shed 0.5%-2.4% in the past month or so. Bond yields and prices move in opposite directions; when yields rise, prices fall and vice versa.The rise in 10-year bond yields by 39 basis points since January 5 to 6.23% has hurt mutual funds in these categories. Investment advisors said investors should buy debt funds that can be held to maturity.Long-term debt funds, which are most sensitive to interest rate changes within fixed income categories, have lost 2.37% in the past one month and 1.73% in the past three months, according to Value Research. Dynamic bond funds lost 1.05% and 0.70% in the past one- and three-months respectively. Banking and PSU debt funds, considered one of the safest because they invest in AAA rated paper lost 0.5% and 0.31% in the same period.Financial planners believe investors eyeing predictable returns with low volatility, could invest in debt schemes that use the so-called roll-down strategy. Schemes that follow this strategy build portfolios by holding bonds of a certain tenure and hold them till maturity, reducing risks to sharp interest rate moves“In uncertain times when bond yields move up, a roll down strategy gives investors an opportunity to lock in their investment at a higher interest rate in good quality portfolios with predictable returns,” says Amol Joshi, Founder, Plan Rupee.Some of the popular funds which follow the roll down strategy are Nippon Floating Rate, Nippon Dynamic Bond, IDFC Banking and PSU debt, IDFC Corporate Bond, DSP Savings Fund, DSP Corporate Bond, Axis Dynamic Bond and Axis Banking and PSU Debt. For example, DSP Savings Fund follows a one-year roll down strategy. Around March-end when the securities in the fund near maturity, the fund manager invests the corpus in one-year money market instruments such as certificate of deposits, commercial paper and T-bills. Every year as fixed income instruments mature the fund manager aims to reinvest in one-year money market instruments.Fund managers believe there is low credit risk in such strategies and these funds stay away from illiquid non-AAA rated or lower rated paper. “A roll down strategy works better in liquid portfolios,” says Anurag Mittal, Senior Fund Manager (Fixed Income), IDFC AMC.“Availability in open-ended funds, products across different tenures and visibility of returns are attracting investors to this strategy,” says Arun Sundaresan, Head of Products, Nippon Mutual Fund.