Equity investors may be having a nightmarish time but investors in debt funds have something to smile about. Long-term gilt and bond funds have rallied sharply in the past month, with many of them delivering returns of above 4%.
The consistent drop in the 10-year bond yield in the past four weeks has pushed up NAVs of these funds. The benchmark yield has dropped from a high of 8.97% on November 14, to 8.46% on December 12 following signs of easing inflation and hopes of a CRR cut by the RBI.
The biggest gainers have been funds that lined their portfolios with long-term bonds. The average maturity of bonds in the portfolio of the top-performing Birla Sun Life Gilt Plus PF fund is over 10 years. The bonds with Kotak Gilt Investment fund have an average maturity of over 15 years. When yields fall, the value of these long-term bonds rises.
The average medium- and longterm gilt fund has risen 3.4% in the past one month. On an annualised basis, this means a return of over 40%.
Experts say while long-term funds have risen sharply in the past month, the growth from here on will not be as spectacular. "Long-term funds will continue to give good returns because the interest rate cycle has peaked. But it's unlikely that the 4% return per month will be replicated," says Mahhendra Jajoo, head-fixed income, Pramerica Mutual Fund.
This scintillating performance comes after several quarters of sluggish growth. Most long-term debt funds have performed abysmally in the past three years because of the steady rise in interest rates.
The consistent drop in the 10-year bond yield in the past four weeks has pushed up NAVs of these funds. The benchmark yield has dropped from a high of 8.97% on November 14, to 8.46% on December 12 following signs of easing inflation and hopes of a CRR cut by the RBI.
The biggest gainers have been funds that lined their portfolios with long-term bonds. The average maturity of bonds in the portfolio of the top-performing Birla Sun Life Gilt Plus PF fund is over 10 years. The bonds with Kotak Gilt Investment fund have an average maturity of over 15 years. When yields fall, the value of these long-term bonds rises.
The average medium- and longterm gilt fund has risen 3.4% in the past one month. On an annualised basis, this means a return of over 40%.
Experts say while long-term funds have risen sharply in the past month, the growth from here on will not be as spectacular. "Long-term funds will continue to give good returns because the interest rate cycle has peaked. But it's unlikely that the 4% return per month will be replicated," says Mahhendra Jajoo, head-fixed income, Pramerica Mutual Fund.
This scintillating performance comes after several quarters of sluggish growth. Most long-term debt funds have performed abysmally in the past three years because of the steady rise in interest rates.
As RBI turned the screws on inflation, the benchmark 10-year government bond yield rose from 5.4% in December 2008 to 7.5% in 2009, 7.9% in 2010 and finally touched 8.97% in November this year. While short-term debt funds were cushioned from the impact of the hike in rates, the NAVs of long-term funds went into a tailspin.
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