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Bond Funds Fail to Regain Lost Assets

Short-term investors, who exited at a loss are still nursing their wounds and are unsure about the direction of the bond markets despite rate cuts in October and yields touching historical lows

Bond fund investors are unlikely to forget the September volatility and ensuing losses in a hurry. Thus, despite a sharp turnaround in October with one-month return of 1.84 per cent, the category of bond funds has seen its assets under management go up by only Rs 1700 crore. The money guzzlers of the current calendar had seen their assets droop by whopping Rs 4000 crore in September and ended the month with a rare average loss of 0.22 per cent. Much of the erosion in asset base was blamed on short-term investors, who pressed the redemption button after the September 11 attacks and the consequent dip in bond prices.

Some of the big bonds, who bore the brunt of redemption, have managed to recover only a part of the lost ground. Take for instance, Grindlays Super Saver Income. The fund saw its assets erode by over Rs 600 crore in September volatility but retrieved only Rs 256 crore last month. On the other hand, Templeton India Income lost another Rs 16 crore in October after taking a hit of Rs 381 crore in September. Another large player, HDFC Income has seen its corpus limp up by only Rs 79 crore after it had plunged by Rs 263 crore in the previous month. However, some funds have come back strongly. For instance, JM Income's assets have galloped back by Rs 165 crore after a loss of Rs 158 crore in September. Ditto for Reliance Income, whose asset base propped up by Rs 241 crore in October after wilting by Rs 114 crore in the redemption hurricane.

Trickling Inflows!
  Fund  August  September  October
  Grindlays SSI 2032.63 1427.17 1683.87
  Templeton India Income 2233.90 1853.06 1837.24
  Alliance Income Fund 1305.57 932.10 1053.11
  Pioneer ITI Income Builder 1431.63 1067.25 1234.27
  Pru ICICI Income Plan 2874.66 2556.84 2777.27
  Zurich India High Interest 1097.38 793.76 902.51
  HDFC Income 1950.67 1687.41 1766.21
  DSPML Bond 1391.58 1129.42 1192.75
  Birla Income Plus 2208.74 2007.42 2029.48
  IDBI PRINCIPAL Income 604.54 444.43 466.67
  JM Income Fund 527.53 369.17 534.47
  K Bond Deposit 453.27 302.49 434.23
  Reliance Income 435.33 320.81 562.17
  Sundaram Bond Saver 540.90 494.29 552.55
  JF India Bond 249.60 203.73 214.47  
  Tata Income 143.13 100.17 98.20  
  Tata Income-DH 340.13 298.46 248.41  
  IL&FS Bond 119.93 94.89 98.43  
  ING Income Portfolio 186.74 182.21 183.13  
  Dundee Bond PSU 4.23 3.68 3.09  
  Libra Bond Fund 1.06 0.65 0.70  
  Dundee Bond Corporate 2.63 2.67 2.70  
  Magnum Income 874.82 878.66 938.13  
  PNB Debt 65.00 70.00 73.00  
  Sun F&C Money Value Bond 190.00 137.64 185.00  


Clearly, the sudden volatility and losses in the hitherto "stable" category of bond funds stirred up investors. For one, bond funds now own a sizeable allocation in government securities, which are highly liquid and sensitive to any abrupt changes in the market direction. Thus, their plunge in prices pulled down net asset values. Two, redemption pressure in a jittery market forced funds to offload at losses, which further dented the NAV. While bond funds have now more than recovered their losses, some investors, who pulled out in the immediate aftermath of September 11, are still nursing their wounds. Hence, despite interest rate cuts in October with yields touching historic lows, they may not flock back to debt funds in the immediate future after a taste of the underlying volatility in bond markets.

The Wrong Sales Pitch
Fund houses are themselves to be blamed for encouraging hot inflows on the assumption of a stable interest rate out look. However, despite the September lesson, most debt funds still continue to operate on a no-load basis to attract large ticket investments for a few months. Recently, an AMC waived off the load on its open-end debt fund for the month of November on big applications. "We have no choice when our rivals are doing the same," says an official of the AMC with a "blame-it-on-them" attitude. Well, with such shortsighted objectives, the BOND with investors is sure to develop cracks.