facebook

Why am I seeing a negative return in my safe debt funds in the very short-term after investing?

IME Capital Investment Queries provide answers to common investor queries that are directly written by IME Capital’s Central Investment Team. This helps ensure centralised, common and transparent communication of our thoughts to all investors (& potential investors) of IME Capital, and helps mitigate against the disparate communication common in the wealth management industry.

Written by IME Capital’s Investor Desk on May 5, 2022

Bond prices fall when interest rates move up (this is true even in very low duration funds with low interest rate sensitivity). Now, if the fund has an yield of 4.5% (it will earn 4.5% through the year) – but if interest rates move up immediately post investing the Mark-to-Market hit of (say for example 0.2%) takes place immediately (versus the interest which is earned through the year). This is why in the very short-term there may be some small marginal negatives even on debt funds, but these reverse automatically over the year as the interest gets earned.

The same holds true in reverse. If interest rates fall shortly after investing, there can be immediate mark-to-market profits on the bond portfolio, that can lead to very high annualised yields being indicated in portfolio reports. This very high yield will also get adjusted over a period, as the effect of annualising a small positive return over a very short-term period adjusts itself as the investment horizon increases.