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Bond funds move 50% portfolio to cash as inflation breaches 6%

June 30, 2021 01:07 PM

Bond funds move 50% portfolio to cash as inflation breaches 6%
Bond funds move 50% portfolio to cash as inflation breaches 6%; Since that was a year of big economic shock, the RBI ignored the inflation.

The Bond funds move 50% portfolio to cash as inflation breaches 6%. A series of interest rate cuts and then rising bond yields have already caused a high level of volatility in the returns offered by long duration debt funds in the last one year. Long-term debt schemes, in the last one year, have offered returns ranging from double-digit to negative.

Fund managers fear that the increasing threat of inflation in domestic as well as the global markets, may further dampen the performance of these funds. They prefer to hold higher cash positions in their schemes to hedge the risk as a comfort to the investors.

“We had for now increased cash levels to approximately 45-50 per cent in our actively-managed bond and gilt funds as at June 21, 2021. Recent events (concerns around inflation) have emphasised to us the importance of this flexibility and the need to have it in amounts that can significantly buffer us against market volatility,” says Suyash Choudhary, Head of Fixed Income, IDFC Mutual Fund. The calls may change at any time based on our evolving assessment.

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Bond funds move 50% portfolio to cash as inflation breaches 6%; Since that was a year of big economic shock, the RBI ignored the inflation and kept monetary policy extremely accommodative to revive growth. This was also based on a hope that the inflation is transitory and will come down over the period.

“Evidently, inflationary pressures have sustained,” says Pankaj Pathak – Fund Manager – Fixed Income, Quantum Mutual Fund. According to Pathak, retail inflation has a history of being sticky. It usually creates a feedback loop and feeds into inflationary expectations of consumers that can lead to even more inflation. Household inflation expectation as per the RBI’s survey has already started moving higher.

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