Transform Your Portfolio with India's Bond Market Opportunities

Posted On Friday, May 24, 2024


India’s bond market is growing. Particularly with the nation’s slated inclusion in the JPMorgan widely tracked Government Bond Index-Emerging Markets (GBI-EM), June 2024 onwards. This move is expected to channel more investments into Indian debt securities, marking a pivotal shift in the global perception of the Indian bond market. In this article we’ll explore India’s anticipated inclusion in the JPMorgan Index, the landscape of the bond market in India, opportunities presented by India’s Bond Market, and why the Quantum Dynamic Bond Fund may be the right choice for you.

India’s Anticipated Inclusion in the JPMorgan Index

The inclusion of Indian bonds in the JPMorgan index is expected to be a game-changer. Indices such as these, serve as benchmarks for investment by institutional investors around the world, guiding the flow of funds. The entry into this index signals confidence in the Indian economy’s stability and growth prospects. This is a one more milestone for the nation.

India's Bond Market

India's bond market comprises government securities (G-Secs), corporate bonds, and other financial instruments. As of September 2023, the Indian bond markets, reached a total value of ₹205.3 lakh crore, approximately equivalent to US$2.5 trillion1. The Government of India (GOI), along with the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI), has implemented various reforms to deepen the bond market.

With a growing economy and ongoing reforms aimed at enhancing market transparency and efficiency, India offers an attractive investment landscape. Investing in India’s bond market presents a compelling opportunity for both domestic and international investors.

The Opportunities Presented by India’s Bond Market

The growing interest in India’s bond market is underpinned by several key factors that create a conducive ground for investment opportunities. Here are three key factors:

1. Diversification Benefits

Indian bonds provide a diversification option for investors looking to spread risk across asset classes. The Indian economy’s growth drivers are different from those of developed markets. Bonds are relatively less volatile than equities and the two often move in opposite directions. Adding some exposure to bond funds in an equity portfolio helps reduce volatility or risk of the overall portfolio.

2. Enhanced Liquidity

As the market matures and more players enter, liquidity in the Indian bond market is set to improve. This will alleviate a concern for investors, making it easier to enter and exit positions.

3. Increasing Foreign Inflows

Even ahead of its inclusion in the global index, India has seen a rise in foreign investment in its bond market. This trend is driven by the relatively high yields offered by Indian bonds compared to those in more developed markets, coupled with sound economic fundamentals.

Are Dynamic Bond Funds a Strategic Option to Fixed Deposits?

With fluctuating interest rates and evolving financial markets, investors who are traditionally reliant on savings accounts and fixed deposits (FDs) are increasingly looking towards more dynamic investment avenues with a better return potential. Another option to FD’s and savings accounts, can be a dynamic bond fund. These funds have the potential to generate higher returns over traditional fixed income instruments such as bank deposits. But also providing flexibility in managing interest rate risks.

Fixed deposits offer a predetermined interest rate over a fixed tenure. However, dynamic bond funds adjust their holdings across different durations and types of bonds, based on the interest rate outlook and subject to market risks.

The Quantum Dynamic Bond Fund (QDBF)

Quantum Dynamic Bond Fund is an actively manged bond fund with over nine years of a track record. The Fund was launched in the year 2015 with an objective to offer an all-weather fixed income solution to investors.

This fund is suitable for investors looking for long term fixed income solution as portfolio diversification, wealth generation or for a regular income.

QDBF is an open-ended debt scheme that is actively managed based on interest rate views, while keeping the credit and liquidity risks to minimal levels. The fund tends to invest in high quality debt and money market instruments.

If interest rates are expected to rise, the fund will invest in short term securities that mature early and re-invest the proceeds at a higher rate. Conversely, if interest rates are expected to fall, the scheme will invest in long term bonds to lock in high interest rates while providing capital growth.

4 Reasons to invest in the Quantum Dynamic Bond Fund

Interest Rate Sensitivity

The performance of dynamic bond funds is closely linked to changes in interest rates. In a falling interest rate environment, bond prices increase, which can lead to capital gains in addition to the interest income generated by the bonds. Conversely, in a rising interest rate environment, these funds can reduce their duration to minimise capital losses.

Re-investment Risk – A Consideration

Re-investment risk is a consideration for investors. In the context of fixed deposits, re-investment risk arises when:

  • The investment matures and,
  • The funds must be re-invested at a potentially lower interest rate than the original deposit.

This scenario often occurs in a declining interest rate environment, where the returns on new deposits can be less favourable, directly impacting the investor’s income stream and financial planning.

Dynamic bond funds inherently manage re-investment risk through active portfolio adjustments. Fund managers in dynamic bond funds actively shift the portfolio’s duration and the mix between debt securities, in response to changing interest rates. This active management aims to optimise the yields and potential capital gains across varying market conditions. Thereby mitigating the re-investment risk that comes with having to periodically re-invest in a static interest rate environment. Thus, dynamic bond funds offer a strategic advantage by potentially providing higher and more stable returns over periods of interest rate fluctuations.

Dynamic bond funds are particularly suited for investors who:

  • Are looking for an alternate option to fixed deposits,
  • Wish to maintain flexibility in terms of investment duration and access to funds,
  • Are looking to enhance their portfolio's risk-adjusted returns through diversification in debt instruments.

You can find below, the performance QDBF Scheme returns as compared to Tier 1 benchmark returns.

Data updated as of April 30, 2024
# CRISIL Dynamic Bond A-III Index ## CRISIL 10 Year Gilt Index

Past performance may or may not be sustained in the future.
Different Plans shall have a different expense structure.
Returns are calculated on the basis of Compounded Annualized Growth Rate (CAGR).

The Scheme is managed by Mr. Pankaj Pathak. He is managing this fund since March 2017. Click here for performance details of other funds managed by him.

Wrapping up,

For investors, the burgeoning Indian bond market offers a unique blend of risk and reward, underpinned by robust economic fundamentals and progressive regulatory reforms. As such, it represents a component of an emerging market investment strategy. Overall, investing in India's bond market allows investors to tap into the country's dynamic economy while mitigating risk and generating steady returns.

Happy Investing!

*Investors should consult their financial advisers if in doubt about whether the product is suitable for them.

The Risk Level of the Scheme in the Risk O Meter is based on the portfolio of the scheme as on Apr 30, 2024

Potential Risk Class Matrix – Quantum Dynamic Bond Fund
Credit Risk →Relatively LowModerate (Class B)Relatively High (Class C)
Interest Rate Risk↓
Relatively Low (Class I)   
Moderate (Class II)   
Relatively High (Class III)A-III  

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.

Mutual Fund investments are subject to market risks read all scheme related documents carefully.

Above article is authored by Quantum.

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