I am looking to buy a debt fund. I choose two funds which are

HDFC CASH MANAGEMENT FUND-TREASURY ADVANTAGE PLAN-G

Birla Sun Life Floating Rate Fund - Long Term Plan - Retail Plan (G)

HDFC is too much diversified whereas Birla is diversified to around 10-12 banks. Which one is better, too much of diversification or limited diversification?

Looking at the return details from moneycontrol site I am thinking to choose Birla Sun Life Floating Rate Fund - Long Term Plan - Retail Plan (G).

Please share your views & any other suggestions are also welcome.

What is the intended purpose ? Period of holding ?

If your objective is capital appreciation from fixed income instruments, now with interest rates set to decline it is prudent to purchase low coupon-long term bonds over high coupon-short term bonds as the former will show much higher price appreciation in a falling interest rate cycle.

I intend to hold for 3 to 5 months time maximum.

It is a bouncer to me. What do you mean by this? .

Little bit more explanation please.

Bond prices vary inversely with yield. So greater the price, lower the yield and vice versa.

The convex price-yield relationship will differ among bonds or other cash flow streams depending on the coupon and maturity.

The convexity of the price-yield relationship declines slower as the yield increases.

You need to further understand two key things:

1) Modified Duration:

Modified duration is the percentage change in price for a nominal change in yield.

MD is the slope of the curve at a given yield, mathematically is the first derivative of price with respect to yield divided by price.


2) Convexity

Convexity is a measure of how much a bond’s price-yield curve deviates from the linear approximation of that curve.

Convexity always is positive number, implying that the price-yield curve lies above the modified duration (tangent) line

Now come to the change of prices of bonds

Changes in a bond’s price resulting from a change in yield are due to:
1) Bond’s modified duration
2) Bond’s convexity
(both explained above)

And further a bond pricing theorem which suggests :

For a given difference between YTM & coupon rate the longer the term to maturity the greater will be the change in the price with change in YTM.

Now aided with these three things we see that greater the maturity (long term) and lower the coupon the higher will be price sensitivity. So that long term and low coupon bonds will have maximum sensitivity to yield changes and in effect will show maximum price variation.

If you expect a decline in interest rates, increase the average modified duration of your bond portfolio to experience maximum price volatility.
>> Hence go for low coupon - long term bonds.

If you expect an increase in interest rates, reduce the average modified duration to minimize your price decline.
>> Hence go for high coupon - short term bonds

Thus as we are approaching a decline in interest rate cycle, I suggested :