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Quick Gains For Income Funds

Cuts effected in the repo rate brought some quick gains for income funds

With the RBI announcing a repo rate cut of 25 basis points in its monetary policy, the net effect of that has been a decline in the yield of the benchmark GOI paper by as much as 6.27 per cent—lowest in the past six weeks.

With the sharp upturn in the benchmark GOI yield in 2009—19.38 per cent gain since January 1, 2009 to April 21, 2009—the debt funds (Gilt-Medium & Long-term, Debt Medium & Long-term and Debt Medium & Long-term Institutional) that invest in medium and long-term debt instruments delivered a negative YTD return of 3.05 per cent.

But RBI’s rate cut brought some quick gains for these funds and they turned out to be the key beneficiaries among all debt funds powering from negative to positive territory. The average one day return of these funds was 0.80 per cent on April 21, 2009. Some of these funds managed to pull off even better gains. Of the total of 128 funds, 60 delivered a return of 1 per cent or more—quite significant for a bond fund. For the past week this tots up to a 2.08 per cent return and that makes these funds as the best-performing among all fixed income funds category.

Among all the funds, Gilt funds benefited the most since they, as per their mandate, invest primarily in government papers which are more susceptible to changes in interest rates. Two gilt funds actually achieved more than two per cent gains—LICMF GSF (2.13%) and ICICI Prudential Gilt Investment PF (2.08%).

With bolder maturity calls as compared to their own category these funds were able to deliver superior returns. LICMF GSF has an average maturity of 18.20 years and ICICI Prudential Gilt Investment PF of 17.45 years as on March 31, 2009, while the average maturity of bond funds was 5.88 years.

In fact, some of the funds which took a conservative stance and kept their maturity levels pegged at lower levels managed to deliver negative returns yesterday. Three Franklin Templeton funds—Templeton India GSF PF (2.83 years), Templeton India GSF Composite (2.83 years), Templeton IGSF Long-term (4.32 years) and Reliance NRI Income (.003 years) were in the negative territory.

With certain analysts predicting further rate cuts, and if this were to happen, then there may be a chance that these funds gain further.