Can the Fed orchestrate a soft landing? What to expect from the Jackson Hole Symposium?

US stocks declined for a third straight session as investors await the Federal Reserve’s annual meeting in Jackson Hole on Thursday. Fed Chair Jay Powell will give a speech on Friday morning.

Remembering the ’90s: Can the Fed manage another soft landing? (by Kristina Hooper, Chief Global Market Strategist)

A soft landing in the 1990s

Back in the 1990s, the Fed was able to execute a soft landing for the economy after instituting a tightening program to help rein in inflation.

The Fed raised rates - including a mega rate hike of 75 bps - between Dec 1993 and Apr 1995, but the economy was able to avoid recession.

Unemployment fell modestly and stocks actually rallied - in fact, the S&P 500 returned 37.58% in 1995 and another 22.96% in 1996.

 

Can the Fed execute another soft landing today?

As I look back on the 1990s, what I most want is for the Fed to execute another soft landing today. I think that’s unlikely.

But I do believe there’s still a very good chance of a “softish” landing, one in which the US economy does not go into a full-blown recession but does slow significantly.

A significant slowdown that moderates demand is needed to get inflation under control.

Much will be dictated by the Fed’s path from here.

 

What to expect from the Jackson Hole Symposium?

I expect Powell and other Fed officials to remain hawkish.

Aggressive rhetoric would be very likely to send stocks down globally in the near term. Asset owners should be prepared for short-term volatility.

But what’s far more important is the incoming data and what the Fed will do in September.

I expect a 50 bp rate hike in September based on the data I have seen thus far.

Having said that, Sept. 20–21 (the next FOMC meeting) is a long way away in the world of economic data.

All I’m asking for is that the Fed be data dependent, that it be sensitive to incoming data.

That will make the blunt instrument that is monetary policy as close to a surgical tool as possible and give the Fed the best chance at providing the appropriate policy prescription for the US economy.

 



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Dynamic bond funds

Bond Funds That Play “Duration” For Capital Appreciation

Dynamic, meaning it can change according to your requirements. But, you might be wondering how such a word can apply in the context of investments.

Before understanding Dynamic Bond Funds’, we need to know about Dynamic Mutual Funds.

A dynamic mutual fund is a mutual fund that is dynamic in nature. It means that the fund manager can change the fund’s underlying instruments, such as stocks and bonds, to align with the current and future expectations of the fund. 

The objective of this fund is to deliver optimum returns in falling and rising market cycles. Unlike a regular fund that looks to buy and hold the instruments for the long run, a dynamic fund aims to make the best out of the current market situation.

What are the Dynamic Bond Funds?

Dynamic bond funds are debt mutual funds that invest in debt or fixed-income securities such as government and corporate bonds. These funds are always open to investment and redemption.

The fund managers invest for different lengths of time depending on how they think interest rates will change.

Most of the time, dynamic bond funds are riskier than short- and medium-term bond funds. Still, they have the potential to give better returns in different interest rate scenarios and for long enough periods.

How do Dynamic Bond Funds work?

The Macaulay duration is the average weighted term to maturity of a fixed-income security’s cash flows. Macaulay Duration is, in simple terms, the weighted average number of years an investor must hold a position in a fixed-income instrument until the present value of the cash flows from the fixed income instrument equals the amount paid for the instrument. Macaulay duration is similar to another measure of duration called Modified Duration, often called Duration. Modified Duration is the change in the price of a bond for every 1% change in the interest rate. In other words, Modified Duration measures how sensitive fixed-income security is to changes in interest rates.

Dynamic bond funds can put their money in bonds with different maturities. The duration of a Dynamic Bond will depend on the types of securities the fund manager chooses to buy based on how they think interest rates will change in the future. If the fund manager thinks that interest rates will go down in the future, they will put money into bonds with a longer term (longer duration) to make money from the price going up. If the fund manager thinks that interest rates will go up in the future, they will buy shorter-term bonds to lower the risk of interest rate changes and re-invest the money from the bonds when they mature at higher interest rates.

How do Dynamic Bond Funds help in capital appreciation?

Dynamic asset allocation: Dynamic bond funds can invest in securities with a wide range of investment durations. In contrast to other debt funds, they are not subject to any investing mandates. They are not limited in their ability to invest in either short- or long-term securities. Their dynamic asset allocation also enables them to profit from changes in interest rates. They can buy long-duration securities in the event of lowering interest rates. They may invest in short-term securities in the event of rising interest rates. 

No debt fund requirement: Dynamic funds don’t have to follow an investing mandate like other debt funds. For instance, only short-term securities may be purchased by short-term bond funds. Dynamic bond funds, on the other hand, are not subject to this limitation. They can also make a one-month investment in long-term securities. Interest rate changes are the center of the overall approach.

Advantages: Tax on Long Term Capital Gains(when debt fund remains invested for a period of 36 months or more) is taxed at 20% after allowing indexation benefits, thus leading to a huge reduction in taxable income and saving a large chunk of income tax.

Ideal for: These funds are ideal for investors who don’t want to actively take calls in making a decision based on interest rate movements.

This blog is purely for educational purposes and not to be treated as personal advice. Mutual funds are subject to market risks, read all scheme-related documents carefully.

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Why Should You Plan for Your Child’s Education?

Why Should You Plan for Your Child’s Education?

Saving and planning for your child's education can be a daunting task for many parents. The level of responsibility and the amount of money that one has to save and invest requires a lot of wisdom and knowledge. This blog will look at the need to have a financial plan for your child's education and some easy steps.

If you think that there is enough time to plan for your children's education, think again. The best and first step you need to follow if you want your child's dreams to become a reality is to invest in their education ASAP.

Don’t trust us? Let us look at the figures.

Let us assume you would like it if your daughter does an MBA from a prestigious college in the US. She is too young to understand, but you want to be prepared.

To help you understand the importance of early investing, let us consider two scenarios. In the first scenario, you invest when she is three years old, and on the other hand, you invest when she is ten years old. If we assume that she might want to pursue an MBA at the age of 21, then considering an inflation rate of 5%, you will need to accumulate Rs.2.41 crore and Rs. 1.71 crore respectively.

However, you will require a monthly SIP of around Rs.31,000 when she is three and almost the double SIP amount if you invest when she is 10 years. This is the power of compounding. The sooner you invest, the better.

 

Daughter's age

3

10

Years left to pursue MBA

18

11

Current MBA in USA fees

1 crore

1  crore

Inflation Rate

5%

5%

Amount required

2.41 crore

1.71 crore

Expected return from investments

12%

12%

Total Investment

68.59  lakhs

83.03 lakhs

Monthly SIP

31,755.43

62,904.21

  

Now that you understand the necessity of child education planning, let us go over some basics that will assist you in deciding about your child's education.

Know how much time you have

Calculate your child's graduation year and post-graduate years. You can determine the time horizon by estimating the number of years.

Figure out the total education cost

The first step is to determine the overall cost of your child's education. This depends on several things, such as whether your child wants to have a global education or prefers to study somewhere closer to home and the discipline that your child likes.

Know where you financially stand

To get a sense of where you are today and how to plan for the future, make a note of all of your assets and liabilities. This can assist you in making better plans. While preparing for your child's education, keep in mind that you should avoid dipping into your investments for other financial goals, particularly your retirement fund.

You should also avoid using funds set aside for your child's education for non-educational purposes, such as house renovations.

Decide how much you need to save/invest

Once you know how much college will cost, you can plan accordingly. Decide how much you need to save right now or how much of a monthly contribution you'll need to meet this goal by the required time.

One simple way is to start a Systematic Investment Plan in a mutual fund and make regular contributions for your child’s education plans.

To make a more significant contribution, you can eliminate unnecessary items from the budget or look for an additional source of income.

Asset allocation and rebalancing

Asset allocation is the breakup of the different assets, such as equities and debt in a portfolio. Proper asset allocation and investing are the smartest way to invest as per the time horizon and risk profile.

You need to make sure that the asset allocation will help to achieve your child's dreams.

If your investment horizon exceeds five years, consider investing in equity funds, which have the potential to deliver higher long-term returns.

Rebalance your investment portfolio gradually towards fixed income or debt as you get closer to your goal.

A well-thought-out asset allocation boosts your portfolio's returns. It can also operate as a shield, protecting your invested amount during times of market volatility.

Conclusion:

If you are a parent or plan to raise a child, you shouldn’t delay investing in their education. With the rising education costs and volatility in the job market, quality education has become imperative. So, start planning for your kid's future today and make their dreams a reality.    

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