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The Interest Rate Effect

The effect of interest rate hike was seen in bond funds with some suffering from it & some benefiting

January 2008 will go down in history for probably all the wrong reasons. The month sprung quite a few surprises with the Sensex crash and the inflation spurt being taking the cake. The uncanny rise in inflation has continued for the past several months and is giving sleepless nights to almost every Indian citizen.

The onus was hence on the Reserve Bank of India to do something that would curb inflation and in a bid to fight it, RBI resorted to successive hike in interest rates. While some may term this hike as inevitable, a few bond funds were caught unaware. The ripple effect of hardening interest rates was seen in many bond fund portfolios. The bond prices fell and the 10-year GoI yield rose from 7.55 to 9.32 per cent.

Let’s take a look at which funds benefited from the interest rate hike and which suffered.

The 47 medium-term debt funds have posted average returns of 1.31 per cent in the last seven months. Amongst them, 15 funds posted negative returns. The biggest loser was DBS Chola Triple Ace, which was down by as much as 11.45 per cent. The fund’s average maturity period has been around 4 years (Jan-July’08). Moreover the fund was heavy in long dated government securities, with 68 per cent exposure. Next in the line was DWS Premier Bond which was down by 3.42 per cent. The average maturity of the fund was as high as around 13 years (Jan-Apr’08). The exposure in GoI securities in its portfolio accounted for 38 per cent.

Looking at the other side of the coin, Birla Sun Life Dynamic Bond fund with 5.92 per cent return led the pack of funds which gained during the period. The average maturity of its portfolio has been less than 1 year, except in April’08 when the maturity touched around 3 years. In the last seven months, its portfolio was dominated with high quality short-term papers with 90 per cent allocation in P1+ rated instruments. Next in the list was Sahara Income with 5.75 per cent return. The average maturity period of the portfolio seldom crossed 1 year. The exposure in the short-term P1+ rated papers was around 93 per cent.

As the inflation numbers stood at 12.01 per cent by the end of July’08, the fund managers will be keeping their fingers crossed as to where the interest rate would be heading in the upcoming monetary policy.



Losers  
Fund  Returns*
DBS Chola Triple Ace -11.15
Magnum NRI Inv LT  -3.47
DWS Premier Bond  -3.42
JM Income -3.26
Magnum Income -2.47
Gainers  
Birla Sun Life Dynamic Bond Retail 5.92
Sahara Income 5.75
Kotak Flexi Debt Regular 5.02
IDFC Dynamic Bond 3.74
Reliance Medium Term 3.63
*Jan-July'08