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Lightning from War Clouds hits Bond Funds; Shaves off Rs 4,000 Crore

Switchover facility failed to stem outflows. Risk-averse investors simply grabbed cash and ran for cover, refusing to park money even in short-term debt funds

The bond fund juggernaut has finally hit a roadblock with assets under management wilting by over Rs 4,000 crore in the September volatility. Much of the erosion is attributed to redemption as panic investors fled their bond funds to cut further losses. In absolute terms, assets fell from Rs 22,823 crore in August 2001 to Rs 18,731 crore last month. In fact, the redemption figures could be higher, but for HDFC Mutual Fund, which has not yet revealed its asset base for September (an embarrassing disclosure?) The AMC's income fund had a corpus of Rs 1950 crore in August 2001.

Almost every bond fund lost money with big boys taking a bigger hit. Thus, Grindlays Super Saver Income lost Rs 605 crore, Templeton India Income shrunk by 380 crore while Alliance Income saw its assets drop by Rs 373 crore. The others in the plus Rs 300-crore club are Pioneer ITI Income Builder, Pru-ICICI Income Plan and Zurich India High Interest. On the other hand, Only four bond funds have seen an accretion in their asset base - LIC Bond Fund was a glaring exception with its corpus gaining Rs 28 crore. The outflows have also put an end of the consistent streak of positive flows in bond funds in the current financial year – till August, 2001, the category (excluding cash funds) received investments of Rs 10,833 crore with inflows peaking at Rs 5238 crore in June 2001.

While most asset management companies claim that investors have only switched over from debt to cash funds, the figures speak otherwise. While debt funds have seen a net outflow of Rs 4092 crore, cash funds have seen their assets go up by a mere Rs 1335 crore. Thus, money has simply moved out with risk-averse investors unwilling to take any chance. Cash funds emerge as an ideal short-term parking lot since they offer minimal downside when bond markets turn volatile.

The Faulty Sales Pitch Asset management companies have again been a victim of their myopic targets in this game of one-upmanship. With bond markets on fire since early 2001, most debt funds were quick to remove their loads to attract hot inflows. The competition was fiercer since fresh investments in equity funds had virtually tapered off. While debt funds are labeled as an ideal vehicle for investments horizon of one-year and beyond, fund houses are known to have hard sold this category to short-term investors, swearing by a positive interest rate outlook. Clearly, there is a world of difference between what they preach and practice!

The short-term big-ticket investors were the first to press the redemption button when bond markets turned turtle after terrorist attacks on the US. The losses were also sharp in the initial period with the yield on the 10-year benchmark rising by nearly 100 basis points from its historic low of 9.5% in August 2001.

With uncertainty looming large, bond prices turned highly volatile and absence of exit loads as an effective deterrent catalysed mass exodus. In fact, some funds do not charge a load on big-ticket investments. For instance, Kotak Mahindra's K-Bond shrunk by over 33% or Rs 150 crore since the AMC does not charge an exit load in its wholesale plan (Minimum investment of Rs 1 lakh). Redemption also hit Reliance Income with assets plummeting by 47% or Rs 204 crore. The fund does not charge a load on redemption of amount in excess of Rs 1 lakh.

The Right Approach Well, investors who redeemed would now be ruing their decision since bond markets have stabilised and most debt funds have recouped their losses. The yield on the 10-year benchmark again reached its historic low of 9.5% on Thursday as fears of an imminent war receded coupled with hopes of a rate cut. The underlying liquidity also continues to be strong.

Thus, the lessons from black September are evident for investors – be clear about your investment horizon before opting for the right debt fund. Else, the inherent volatility and event risks will continue to take a toll on your investments. As for mutual funds, they must now practice what they preach. Else, investor faith may now start to erode…. Just like the asset base for bond funds in September!

Black September!
  Fund  08/2001  09/2001  Fall (%)  Fall (Rs cr)
  Grindlays SSI 2032.63 1427.17 -29.79 -605.46
  Templeton India Income 2233.90 1853.06 -17.05 -380.84
  Alliance Income Fund 1305.57 932.10 -28.61 -373.47
  Pioneer ITI Income Builder 1431.63 1067.52 -25.43 -364.11
  Pru ICICI Income Plan 2874.66 2555.28 -11.11 -319.38
  Zurich India High Interest 1097.38 794.00 -27.65 -303.38
  DSPML Bond 1391.58 1129.41 -18.84 -262.17
  Reliance Income 435.33 230.81 -46.98 -204.52
  Birla Income Plus 2208.74 2007.42 -9.11 -201.32
  Chola Triple Ace 480.00 310.00 -35.42 -170.00
  IDBI PRINCIPAL Income 604.54 444.33 -26.50 -160.21
  JM Income Fund 527.53 369.17 -30.02 -158.36
  K Bond Deposit 453.27 302.48 -33.27 -150.79
  Sundaram Bond Saver 540.90 494.29 -8.62 -46.61
  Tata Income 143.13 100.12 -30.05 -43.01
  Tata Income-DH 340.13 298.31 -12.30 -41.82
  Sun F&C Money Value Bond 190.00 150.00 -21.05 -40.00
  IL&FS Bond 119.93 94.89 -20.88 -25.04
  Chola Freedom Income 41.00 32.00 -21.95 -9.00
  ING Income Portfolio 186.74 182.21 -2.43 -4.53
  IDBI Principal Deposit 150.07 149.30 -0.51 -0.77
  Dundee Bond PSU 4.23 3.68 -13.00 -0.55
  Cancigo 40.03 39.48 -1.37 -0.55
  Libra Bond Fund 1.06 0.65 -38.68 -0.41
  Dundee Bond Corporate 2.63 2.67 1.52 0.04
  Magnum LIF 874.82 878.66 0.44 3.84
  PNB Debt 65.00 70.00 7.69 5.00
  LIC Bond Fund 1096.30 1124.50 2.57 28.20
  Net (Rs crore) 22822.73 18730.51 -4092.22