Return from fixed income funds zoomed again with the latest rate cuts announced by the Reserve Bank on January 2. Long-term gilt funds registered an average gain of 1.63% on Friday, while the medium-term bond funds gained 0.79%.
The credit squeeze in October has triggered a series of action by Reserve Bank to ease liquidity in the system. Since September last year till January 2, Cash Reserve Ratio has been reduced by 4 per cent from 9% to 5% in five successive reduction. Repo rate, the rate at which RBI lends to banks has also been reduced by 350 basis points to 5.5% now. The Reverse Repo Rate, rate at which banks park their surplus funds with RBI has been reduced by 200 basis points to 4% now.
This rate cuts in a brief period has lead to the rally in the government bond prices. The yield of 10-year G-Sec fell significantly from 8.68% on September 1, 2008 to 5.35% on January 2.
Fixed income funds of all kinds have substantially benefited. The biggest beneficiaries were the long-term gilt funds which are up 22% in the past 3-months. And the top performer was ICICI Pru Gilt Investment PF fund which is up 37.40%. Even the medium term bond funds have gained 12.5% over the past 3-months. Here again, the top slot was with ICICI Pru Income Institutional plan with a 22.15% gain.
Fund returns quoted above are are as on January 2, 2009.