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http://dspblackrock.com/knowledge_center/bond-fund.asp
6/26/2010
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Price risk Maturity profile of the portfolio will determine price risk: Interest rates move up and down all the time, determined by macroeconomic influences as well as structural and technical funds flow reasons. This movement of interest rates has significant impact on the pricing of bonds depending on the maturity of the bond. If a bond is due to be redeemed in the short term - say less than a year, the impact of a rise or fall in interest rates will be much lower than on a bond with 10 years tenure. Similarly a portfolio consisting of bonds with a low average maturity profile will have low impact on price movement in the NAV price as a result of volatile interest rates as compared to a fund with higher average maturity. In order to maximise gains to the fund, the portfolio should take into account possible interest rate movement in the future, although it is difficult to predict interest rate movement. So in a volatile environment, a portfolio is well positioned if it is at the short end of the market The price risk arises from the ability of the fund manager to forecast future interest rate movements. Volatility Volatility of NAV prices is also regarded as a factor that influences the investor in his choice of funds. We believe that volatility is important in a relative sense against a benchmark, or peer group funds, in the absence of an appropriate benchmark. However, we are also of the view that short term volatility arising out of anomalies in pricing and valuation methodologies adopted by funds, are unimportant in relation to longer term volatility say over 6 months and preferably on a 12 month basis. Investors in bond funds typically don't come for the short term. So the volatility match must be looked at in the context of the investors time horizon, which would typically be 6 months and above. Valuation & Transparency In the long run the performance return to trend due to shorter term valuation anomalies, in the absence of industry guidelines and uniformity, there are shorter term aberrations as different funds follow differing valuation methodologies. SEBI has recently issued guidelines on valuation norms and practices across the industry, which is good news for investors. Corpus The size of the fund is also very important. Larger funds have the ability to be more diversified in their investments thereby reducing market risk somewhat. In addition larger funds will also have the first pick of the cherry in terms of investment issues and in the market. For larger investors particularly, size of the fund will offer liquidity, diversification and the probability of higher returns.
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http://dspblackrock.com/knowledge_center/bond-fund.asp
6/26/2010