How to invest in rising bond yield scenario

In this episode of, ‘Mutual Fund Corner’, Ashish Shanker, Managing Director (MD) and Chief Executive Officer (CEO) at Motilal Oswal Private Wealth talked about investing in rising bond yield scenario and how investors can navigate volatility in markets.

“In a rising interest rate scenario, funds which have longer maturities (those which have more than five or seven years tenure) tend to show a negative return or lag because as rates rise, bond prices tend to fall and they are inversely correlated. So first of all, I think people need to have a clear understanding of this. Otherwise, when investors look at their portfolios and they see fixed income funds showing negative return, it can lead to panic because we have not been used to fixed income portfolios giving negative returns," Shanker told CNBC-TV18.

Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.