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Fixed Income Funds Sizzle

Successive rate cuts to halt the economic downturn has boosted the return from fixed income funds

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.