In October, investor sentiment was negatively impacted by expectations of a reversal in interest rate, bond auctions and an increase in industrial output data. These factors caused rise in bond yields, thereby generating negative returns for investor, during the month. The yield on the 10-year 6.9% 2019 government bond increased to 7.29% in October, from 7.19% in previous month.
Earlier in the month, the bond market had expected the Reserve Bank of India (RBI) to end its easy money policy stance and hike interest rate in its second quarter review of monetary policy on Oct. 27. The higher-than-expected industrial output data, which rose 10.4% in August further raised market expectations of an increase in interest rate. The RBI, however, kept all its key rates unchanged except that it raised Statutory Liquidity Ratio (SLR) by 1% to 25%, in order to reduce liquidity in the system to fight rising inflation.
The bond market took comfort from lower-than-expected inflation data, which increased to 1.51% for the week ended Oct. 17, from 1.21% a week ago. Market had expected inflation to rise to 1.55%.
During the month, the mutual fund industry witnessed 24% rise in its assets to Rs 774,796 crores, with income funds receiving higher inflows post the September redemptions. Institutional investors returned to ultra short-term bond funds, thereby pushing the income funds’ category assets by 151,271 crores. Liquid funds experienced outflows (Rs 7,344 crores) for the third month in a row as return from this asset class have been impacted by the Securities and Exchange Board of India’s new mandate of investing in papers of up to 91 days maturity.
Debt Category Performance
Liquid
The Morningstar India Liquid category includes funds with a residual maturity up to 91 days. Since these funds invest in very short duration money market and debt instruments, they offer minimal interest rate sensitivity and therefore, low risk and total return potential.
During the one-year period ended October, the category generated 5.7% return. Out of 23 funds considered for analysis, 12 funds outperformed their peers. In terms of Morningstar risk-adjusted return, LIC MF Liquid emerged as the best performing fund. On an absolute basis, the fund posted 6.7% return.
Ultra Short Bond
Ultra short bond funds invest in investment grade debt securities that have residual maturities of less than one year but greater than 91 days.
During the one-year period, this category posted 6.4% return. Out of 22 funds selected, nine funds beat the category average. Fortis Money Plus was the best performing fund in terms of risk-adjusted return. The fund delivered 7.5% return on an absolute basis.
Short-Term Bond
Funds in the short-term bond fund category invest in corporate and government securities with residual maturities between one- to three-years. These funds are fairly conservative in terms of interest rate risk, compared with longer duration debt funds.
During the one-year period, the short-term bond category posted 11.5% return. Out of 18 funds considered, 11 funds outperformed their peers. DWS Short Maturity fared the best in terms of risk-adjusted return. The fund posted 15.1% absolute return.
Intermediate Bond
Intermediate bond funds invest in corporate and other investment grade debt securities and have average effective maturities between three- to seven-years. Since these funds have higher durations, they are relatively more sensitive to interest rate risks, as compared to short term bond funds.
The category registered 12.2% return, during the one-year period ended October. Out of 19 funds shortlisted, 11 funds outperformed the category average during the year. Canara Robeco Income delivered the best risk-adjusted return. On an absolute basis, the fund registered 15.3% return.
Short Government
Short government funds invest in government securities with one- to three-year maturities. For one-year period, the category delivered 4.2% return. Out of eight funds considered, three funds outperformed the category peers. In terms of risk-adjusted performance, Tata Gilt Short Maturity posted the highest return. On an absolute basis, the fund registered 6.5% return.
Intermediate Government
The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 7.9% return, during the one-year period. Out of 12 funds shortlisted for analysis, six funds beat their category peers. The best performer in this category was ICICI Pru Gilt Treasury. The fund posted 15.3% return on an absolute basis.
Long Government
Long government funds invest in government securities with average maturities of more than seven years. This category generated 6.7% returns during the one-year period. Out of eight funds considered, only three funds outperformed their peers. Templeton Government Securities Long Term fared the best in terms of risk-adjusted performance. On an absolute basis, the fund delivered 13.4% return.
