VR Logo

Exodus in Bond Funds

The massive redemption from medium-term debt funds has some key lesson for the individual investors in these funds as the action of few large investor hurts their interest.

Based on the month-end assets base of funds, we discovered that bond fund witnessed massive exodus of over Rs 4,000 crore in the month of September. This massive run on these funds was primarily on account volatility in bond prices and panic investors fleeing to cut further losses. In absolute terms, assets fell from Rs 22,823 crore in August 2001 to Rs 18,731 crore last month. And this was not limited to few funds. Almost every bond fund lost money with big boys taking a bigger hit. 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. Other fund which lost over Rs 300 crore are Pioneer ITI Income Builder, Pru-ICICI Income Plan and Zurich India High Interest.

Indeed, bond funds were volatile in September after the attack on America. The growing uncertainty about the economic outlook was the key reason. But the volatility and unprecedented single day loss on September 17 triggered massive redemption particularly by the big investors, and these bond fund investors behaved in a manner disproving "Bonds are for gentlemen". They acted like traders, running for cover. Such massive redemption in a short period can be injurious to a fund's portfolio and hence for the remaining investors in a fund. As in a severe redemption pressure, the fund manager will resort to distress sale of securities from his portfolio thereby impacting his portfolio strategy and might lead to portfolio imbalance. And there are few safeguards against such actions of few large investors, which might hurt your investment in a fund.

To an extent, you can guard yourself from such actions, by checking at the load structure of a fund. Such funds often levy a contingent exit load. It might be a put off, but it is a desirable kind of load, particularly useful in these situations. Contingent exit load is levied only if you redeem your investment before a stipulated time period -- generally three to six months period in a medium-term debt fund. This load acts as a deterrent to action of short-term investors in the fund. In fact, this kind of load in the first place keeps away short-term investors in the fund. Besides, the size of a fund can be other useful pointer. A large fund tends to be more stable and the portfolio is relatively less vulnerable to such redemption or inflows in a brief period.

As things stand now, volatility will prevail for a while. But panic action won't help. If you are invested in a bond fund with over 1-year to time horizon, you can ignore the day-to-day volatility. And the recommended reduction on small savings rate, the GOI Bonds and the withdrawal of tax concessions has raised expectations of another interest rate cut. This might help these funds in near term.

Fund Update:
For the week ended October 5, 2001, the markets remained flat on the BSE Sensex as well as the Nifty, registering a single point gain. At its low, for the most part the markets reflected inertia. This week all categories of bond funds registered the usual positive gains and equity funds registered a marginal fall in line with the flat market during the week. However, some of the technology funds witnessed sharp gain -- Pioneer ITI Infotech (2.25%), UTI PEF (1.60%) and Birla IT (1.48%). The big losers were the aggressive equity funds -- Taurus Discovery Stock (-7.21%), Zurich India Top 200 (-5.95%) and ING Growth Portfolio (-3.31%).