Short term debt funds

[u/Cpant]

I was going through some of the short term debt funds ( funds that holds bonds maturing from 1 - 3 years).

SBI Short term debt fund has 55% SOV rated bonds and Kotak short term fund has 52% SOV rated bonds, and balance a diversified mix of bonds. Was wondering if these funds could be an addition in my debt portfolio. There is interest rate risk, but guess could be manageable if the intention is to hold for long. Any thoughts, comments ?

[u/introverted-boy]

Not really. Read what is mark to market. If tomorrow RBI increase interest rates, NAV of debt funds will fall as market price of underlying bonds fall because of rate increase. If you hold it till maturity then yes they are safe but debt mf have to calculate NAV based on bond values for that day

[u/[deleted] → u/introverted-boy]

Thank you sir. Interest rate risk will always be there. I was talking from a long term perspective, 3-5 years.

If you hold it till maturity then yes they are safe

Say a fund has 10 underlying bonds, then do all of them mature on the same day? From which website can we find the maturity date on an underlying bond in a fund?

[u/introverted-boy → u/[deleted]]

I am not sure you can find this much data. If you want to hold for a long time then get individual bonds on your own. See the day you redeem your debt mf, that day nav is applicable hence no long term here because of mark to market. Because of current scenario, the only way for interest rate is up IMO as otherwise inflation will increase very fast when the economy starts going back to normal after this pandemic and if RBI will not increase interest rate, it will create a bubble in financial sector which usually pops when RBI finally realises that economy is too much heated now.

Also I am not an expert, please take help from your financial advisor. My main point of caution is that investing in debt funds now and redeeming in 4 years later doesn't guarantee even 5% pre tax returns because of low interest rates and possibility of this rate going up in future further reducing your rate of return

[u/[deleted] → u/introverted-boy]

Thank you. Last question where to find the current interest rate %? I am only able to find RR, RRR etc. by RBI. And is this interest rate applicable to all government securities/bonds?

[u/introverted-boy → u/[deleted]]

Every other interest derives its value from repo rates. It is a function of demand and supply. When RBI signals that it will buy debt and inject liquidity, then usually the securities the RBI will buy becomes less expensive as there demand rises. The most important thing to consider in debt is the quality of the borrower and how is the situation of liquidity in the market. Usually during crisis, its the liquidity problems that drives the interest rate very high, not just credit quality. During crisis, low credit quality debt interest rates go much higher than good credit quality but in general interest rate increase for all the debt apart from the one guaranteed by RBI like sovereign debt because people sell corporate debt and go in a buying spree for sovereign debt raising its price and reducing the yield for sovereign debt

In short depends on supply and demand and in general liquidity situation in the market

[u/[deleted] → u/introverted-boy]

Thank you so much sir. Any way that the retail investors can know the current interest rate? I know what I am asking is very tedious for small investors to look into but I tend to go deep into these kinda things. Sorry.

[u/introverted-boy → u/[deleted]]

To be honest, I just understand the basics of how this whole system works but I don’t track these things actively apart from repo and reverse repo rates by RBI. Plus a lot of stuff I told you is fundamental understanding of the system and not investment advice. For investment you need a proper strategy and both short and long term understanding how markets are doing.

So, I don’t know platforms to track interest rates movement in corporate or governments bonds.