VR Logo

Tanking yields, Soaring Funds

The month of August saw the benchmark yield on sovereign and corporate bonds reaching their historic

The month of August saw the benchmark yield on sovereign and corporate bonds reaching their historic lows. This reflected ample liquidity in the markets, which got a fillip from the coupon and redemption inflows by the government. That the markets didn't react harshly to the S&P and Moody's downgrades reflected the bullish sentiment among the players. Given a mere 2 percent rise in industrial output in first quarter and the downward revision in the GDP growth estimates, RBI on several occasions hinted at a softer interest rate regime.

The coming month, government is expected to borrow from markets to meet its staff salaries. Depending on the quantum of auction, the bond rally is expected to mellow down and yields to take off from their historic lows. However short, the markets should stabilize presuming that government does not resort to more than one auction and spends within its limits.

With the outlook biased towards a stable interest rate, most of the medium term debt fund managers stretched the average maturity close to 5 years by seeking higher allocation to government securities.

At the Bond Fund Street…

Medium-Term Debt Funds
The tanking of sovereign and corporate bond yields to their historic lows, implying the bond prices at sky, did plenty to pep up the return of 36-member family. Every fund gained on an average a 1.38 percent as against 1.34 percent rise in July. Escorts Income Plan was at the top of the heap with 2.09 percent gain, with Chola Freedom Income closely tracing it with 1.89 percent rise. Along with a two-fold hike in gilt exposure, Chola Freedom Income elongated its portfolio maturity to 3.64 years during the month. With too much of cash (35%) stashed in its coffers, Dundee Bond Corporate gained a mere 0.81 percent

Leaders and Laggards in this category

Medium-Term Gilt Funds
While the sovereign yields are expected to stabilise in coming months, the returns from the gilt funds have starting sobering down. The category posted an average return of 1.77 percent in August with the Pru-ICICI Gilt Investment Plan topping the category with 2.10 percent gain with 8-year maturity acting as a kicker. Escorts Gilt Fund retained its top loser slot with a mere 1.03 percent gain.

Leaders and Laggards in this category
Debt with Marginal Equity
The category comprises of monthly income plans, which predominantly invest in debt and cap their equity exposure up to 15%. And the new breed of Child oriented funds with a similar investment mandate. With full corpus deployed in debt, the savings option of HDFC Children Gift Fund posted a return of 1.41 percent. The six-month old Magnum Monthly Income Plan landed up at the bottom of the category with a mere 0.75% gain.

Leaders and Laggards in this category
Short-Term Funds

Cash Funds
For their short maturity profile, Cash Funds provide superior shelter against the interest rate risks as compared to their long-term counterparts. The 27 cash funds in the inched up with 0.63 percent return with Tata Liquid gaining the most, 0.77 percent.

Leaders and Laggards in this category
Gilt Funds
These funds carry a similar investment mandate as their long-range counterparts, but with a short maturity profile. The category gained a 1.16 percent during the month translating in to a whooping 21% per annum. Birla Gilt Plus Liquid notched the top slot with a gain of 1. 83 percent while Zurich India Sovereign Gilt Savings Plan gained a mere 0.57% during the month. Leaders and Laggards in this category