How to Tackle Bond Drop Crisis

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If you have been watching your “crop,” you would have noticed the Malaysian bond fund has been dropping consistently since 17th September (Tues). Commentators may have noticed there is an outflow of foreign funds from the Malaysia bond market, but no one really knows for sure the cause of it. So far, there is no news coverage highlighting such outflow from the bond market yet. 

We can only suspect that it is most probably caused by the fear of the issue announced earlier in April about Malaysian Bond may exit the index for FTSE Russell’s world index. The result of the verdict will be announced by the end of this month. 

Yet we have no certainty whether Malaysian bonds will be truly “kicked” out of such an index. Even though Bank Negara has been working closely with the rating agency to avert such a scenario. But bond players would most probably worry such effort may not pay off. What if the speculation becomes a reality by the end of September, will Malaysian bond price continue to drop to hell? What if the Malaysian bond will remain in the World Index board? This will be the major concern for those who have seen their profit slowly eroded in this week. Our major question is what should we do now?

Malaysia bond funds are having unusual consistent drop since September 17th, last Tuesday.

Suggestion to Confront Bond Fund Crisis

I have three kinds of suggestions for you to consider; It’s all depending on your scenario. It is hard to generalize for all. 

Normally, in time like this, what I would usually do is switch away from my bond fund and parked temporary into money market fund. There are many money market funds you may consider in the Fundsupermart platform. These funds are listed out in Table A. They are all “0” switching fees and “0” sale charges and risk-free. When you switch, the escape effect will take place immediately at 3 pm on the day you switch away. 

However, if you perform an inter-fund house switch, the beginning of profit on the buying fund may have a different day of entry. All in all, it will take about two weeks for your new fund to show up on your platform. It is, in fact, take some kind of patience in doing that. 

Table A ~ These are the money market funds that can serve as your temporary shelter for bond fund crisis.

After bond fund has touched bottom and stabilized, most probably after September 30th if the announcement favoring Malaysia bond, or later month of October if Malaysian bond fund was really kicked out of the board of index, we will switch back to where it was to take the ride of the new wave up afresh again from the bottom. 

Three Ways to Tackle

There can be three kinds of investors. Each can tackle bond funds drop this time differently. First of all, if your investment is small, for example, your profit may be less than RM100 after six months, you may not want to take this trouble to do such a remedy. After all, bond fund drop may not be as scary as equity fund drop. Even if it drops to hell, you may only lose less than RM100 at the most. And it will eventually recover for sure. So, in this case, you may not want to take the trouble to do anything about it. Afterall the bond drop might not be real or will be short-lived, as you might suspect.

Secondly, if you see your profit has gained a few hundred or even thousands, you may feel the pain if those profits evaporated away after invested for so many months. In this case, you may switch all to the money market fund. 

Thirdly, if your portfolio is large, and has seen your bond fund profit has garnered a few thousand ringgit, you may as well, take profit by switching to the money market. However, you may not switch all away, because you still want your bond fund to play the defensive role escorting your equity funds. In case there will be a market tremor while your bond fund has been switched away, your equity fund will be exposed naked and in great danger. (For discussion of the investment strategy, please read this article here. ) 

In this case, you may consider switching a portion of your defensive warrior away and leave the remaining staying put on guard. In this way, when the drop has stopped, those “army” that has been called away, can be called back to the same position, and they will help pull down the average price or to take advantage of the low price then.

Word of Precaution

If your portfolio is having a large capital size, you might need to take note of where you have switched your fund for shelter during the storm. So that you may know where to switch back after the storm. You can take advantage of a note-taking facility on the Fundsupermart platform called “My Investment Notepad,” just below your fund screen.  

Finally, I have just to assure you that bond drop is nothing to be fearful. It is just temporary and rare. The drop will not drag forever. But I would encourage you to protect your profit and start your new journey at the bottom after the storm. You make a move, not out of fear, but out of opportunity, taking every advantage as a retail investor, especially in protecting your bond investment profit.

One more last word, please switch only those bond funds that invested in Malaysia. Bond funds that focus on foreign markets are not affected. You don’t have to switch.

Happy learning on how to maneuver your investment portfolio! 

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The view and opinion expressed are personal views of the author and are subject to change based on market and other conditions. This write up does not constitute sole advice for an investment decision. Investors are advised to do further reading and research to conclude individual decisions.

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