February 2010: Debt Funds Performance Review

Bond yields rose on expectations of higher government borrowings for fiscal year 2010-11.
By Priyadarshini Dembla |  23-03-10 | 
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About the Author
Priyadarshini Dembla is a research associate with Morningstar. She would like to hear from you, but she cannot provide individual-portfolio or financial-planning advice.

The union budget remained the key highlight for the month with primary focus on reducing the fiscal deficit, controlling inflation and improving economic growth. The fiscal deficit was estimated at 5.5% with further plans to reduce it to 4.8% and 4.15% in fiscal year 2012 and 2013, respectively, which signaled a reduction in the government borrowings. While the GDP growth  slackened to 6.0% in October-December quarter, compared to the previous quarter when it expanded by 7.9%, primarily on the back of agriculture output which contracted by 2.8%, the future growth estimates still continue to be strong. The GDP growth for 2009-10 is pegged at 7.2%.

The bond yields rose on expectations of higher government borrowings for fiscal year 2010-11. The government gross borrowings and net borrowings for the fiscal year 2010-11 has been pegged at Rs 4,57,000 crores and Rs 3,45,000 crores, respectively. The yield on 10-year government bond increased to 7.86% in February, from 7.59% last month. However, yields remained muted in the second half of the month, indicating a lack of consensus over the timing of the rate hike. The Reserve Bank of India raised its cash reserve requirements by 75 basis points, higher than market expectations 50 basis points hike, in January. The credit growth continued to pick pace in the January-February period. The rate of growth in the aggregate credit segment was around 15.1%. 

The inflationary pressures continued to reel over market sentiments. The Wholesale Price Index (WPI) based inflation soared to a 15-month high of 8.56% for the month of January, with the data showing that inflation had spread to the manufacturing sector, creating pressure on the central bank to hike rates at the earliest. However, food inflation managed to ease off marginally to 17.58% for the week ended February 13, compared with 17.97% in the previous week. Further, with the 2% excise duty hike and 5% plus hike on most of the hydrocarbon fuels may further increase the inflationary pressure on the economy. 

In order to merit funds’ long-term performance, they have been ranked based on their one-year Morningstar risk-adjusted return for this review. 

Debt Category Performance


The Morningstar India Liquid fund category registered 4.24% return for one-year period ended February 2010. This category consists of funds with average maturities upto 91 days. Out of 24 funds considered for analysis, 13 funds outperformed their peers. In terms of one-year risk-adjusted return, Sahara Liquid Fixed Pricing registered highest return. On an absolute basis, the fund posted 5.8% return. 

Ultrashort Bond

The ultra short bond category with funds consisting of average maturities over 91 days but less than one year, posted 5.0% return. Out of 21 funds selected, 14 funds beat the category average. LIC MF Savings Plus had the best risk-adjusted performance. The fund delivered 5.7% return on an absolute basis.

Short-Term Bond

During the one-year period, the short-term bond category with residual maturities between one- to three-years, posted 6.84% return. Out of 17 funds considered, 10 funds outperformed their peers. Templeton India Short Term Income fared the best in terms of risk-adjusted return. The fund returned 10.6% for one-year period through February.

Intermediate Bond

This category includes funds with maturities between three- to seven-years and registered 3.65% return, during the one-year period ended February. Out of 20 funds shortlisted, 11 funds beat the category average. Fortis Flexi Debt delivered the largest risk-adjusted return. On an absolute basis, the fund registered 8.0% return.

Short Government

Short government funds invest in government securities with one- to three-year maturities. For one-year period, the category delivered marginal 1.75% return. In terms of risk-adjusted performance, Kotak Gilt Savings Plan posted the highest return. On an absolute basis, the fund registered 3.1% return.

Intermediate Government 

The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 1.34% returns. Out of 13 funds shortlisted for analysis, three funds beat their category peers. The best performer in this category was Birla Sun Life Govt Securities Long Term in terms of risk-adjusted performance. The fund posted 16.4% return for one-year period through February 2010.

Long Government

Long government funds invest in government securities with average maturities of more than seven years. This category generated 0.83% return during the one-year period. Out of 9 funds selected for analysis, only five funds outperformed their peers. Kotak Gilt Investment Regular fared the best in terms of risk-adjusted performance. On an absolute basis, the fund delivered 4.8% return.

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