Alternative to money market fund

Bonds
1

Hai i have a doubt how the money market funds is working - now the yield id 3.5 % only 2 years back it shows return upto 7 to 8% - in zerodha its will treat cash equivalent , any other cash equivalent in market

i know its GSEC is available - most of the bonds are 10 year bond its yield is 7 to 10%
there is one bond is 7.59 gsec isuue date is 2016 maturity is 2026 now its available in 98 rupees
if the RBI is hiking 40bps how the face value of the bond will decrease - how much its will decrease , any body have a perfect answer @Bhuvan @siva

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IMHO 7-8%.

What’s a 10% yield GSEC in current times?
(Genuinely asking. Please share if you see any :mag:… )

Effective Yield ~= Effective annualized Dividend Interest-Rate + (Capital-Gains on Maturity / years to maturity)

  1. Effective annualized Dividend Interest-Rate = 7.59% * (100 /98) = 7.75%
  2. Capital-Gains on Maturity / years to maturity = (100 - 98) / 4yrs = 0.5 %

Thus, an approximate yield of 8.25% over the next 4 years (2022 to 2026).

if the RBI is hiking 40bps how the face value of the bond will decrease - how much its will decrease

Assuming existing GSECs will adjust to match returns i.e. increase by 40-bps i.e. +0.4%
(as market participants will arbitrage any GSEC that is offering lower/higher returns)

Currently, a further drop of Rs.1.25 in the face-value of this bond (i.e 98 → 96.75),
will result in the 0.4% (40bps) increase in the effective yield (~8.25% → ~8.65%).
Calculation: (7.59 * 100/96.75) + (100 - 96.75)/4.

Note1: Such a correction in the face-value of the bond is expected due to market interactions. It is not a guarantee.

Note2: Its not clear to me whether the secondary market participants who are trading the GSEC 759GS2026 around Rs.98 have already accounted for the 40-bps hike. The above calculations of a further drop are performed assuming that the market has not yet accounted for the 40-bps hike.

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