April 2010: Debt Funds Performance Review

Government bond yields remained depressed in the first half of the month as expectations of likely hike in interest rate by the RBI in its forthcoming annual policy meet scheduled on April 20 kept the bond prices under check.
By Priyadarshini Dembla |  13-05-10 | 
 
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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.

Government bond yields remained depressed in the first half of the month as expectations of likely hike in interest rate by the RBI in its forthcoming annual policy meet scheduled on April 20 kept the bond prices under check.  However, towards the end of the month the bond yields eased post the lower-than-expected rate hike announced by the central bank in its monetary policy review. With key focus shifting to managing inflation, the central bank raised the key rates by 25 basis points each with immediate effect.  RBI further announced a 25 basis points hike in the CRR effective from April 24 which is expected to mop up around Rs.12,500 crores of liquidity from the system. During the month, the bond yields rose to its near 19-month high of 8.12% on the back of uncertainty over the issuance of new 10-year bond. The government announced it will auction 50 billion rupees each of a new 10-year gilt and the 7.38%, 2015 paper, along with 20 billion rupees worth of 8.28%, 2032 bond on Apr 30. The issuance of new 10-year bond led to decline in trading in existing 10-year bond, 6.35%, 2020, which closed the month at 8.04%. Call rates dropped on easy liquidity situation. It fell to 3.7% in April from 4.5% in the previous month. 

The WPI inflation inched up marginally to 9.90% in March, from 9.89% in the previous month, primarily on account of easing food prices. The food inflation slid for the second consecutive week ending April 17 to end at 16.61%, as against 17.65% in the previous week backed by forecast of a good winter crop harvest and an expected normal monsoon this year. Going ahead, RBI has forecasted the headline inflation to ease to 5.5% by March 2011 on normal monsoon estimate. 

Despite projecting a 20% bank credit growth this fiscal in its policy review, the expansion of loans decelerated to 16.8% during the one-year period ending April 9, as against 18.1% in the corresponding year ago. In the last fiscal, credit growth stood at 16.9%, above the RBI's projection of 16%. 

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

 Liquid

The Morningstar India Liquid fund category registered 4.0% return for one-year period ended April 2010. This category consists of funds with average maturities upto 91 days. Out of 25 funds considered for analysis, 14 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 5.2% return.

Ultra Short Bond

The ultra short bond category with funds consisting of average maturities over 91 days but less than one year, posted 4.6% return. Out of 22 funds selected, 11 funds beat the category average. LIC MF Savings Plus had the best risk-adjusted performance. The fund delivered 5.4% 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 5.8% return. Out of 15 funds considered, 8 funds outperformed their peers. Templeton India Short Term Income fared the best in terms of risk-adjusted return. The fund returned 10.3% for one-year period through April.

Intermediate Bond

This category includes funds with maturities between three- to seven-years and registered 2.5% return, during the one-year period ended April. Out of 20 funds shortlisted, 12 funds beat the category average. Fortis Flex Debt delivered the largest risk-adjusted return. On an absolute basis, the fund registered 5.7% return.

Short Government

Short government funds invest in government securities with one- to three-year maturities. For one-year period, the category delivered marginal 2.2% return. In terms of risk-adjusted performance, Templeton India Government Securities Treasury Plan posted the highest return. On an absolute basis, the fund registered 2.8% return.

Intermediate Government 

The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 0.4% returns. Out of 11 funds shortlisted for analysis, three funds beat their category peers. The best performer in this category was Birla Sun Life Government Securities Long Term in terms of risk-adjusted performance. The fund posted 7.5% return for one-year period through April 2010.

Long Government

Long government funds invest in government securities with average maturities of more than seven years. This category generated -0.1% return during the one-year period. Out of 8 funds selected for analysis, only three funds outperformed their peers. Kotak Gilt Investment Regular fared the best in terms of risk-adjusted performance. On an absolute basis, the fund delivered 3.8% return.

Note: For the purpose of this analysis, funds have been ranked based on their one-year Morningstar risk-adjusted return; only growth options have been considered. Further, only funds with AUM of more than 20% of the average category AUM as on March 2010 have been considered.

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