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Caught on wrong foot

Long-term gilt funds, income funds and dynamic bond funds were the worst hit

Caught on wrong foot

The recent rise in the bond yields has caught most debt fund managers by surprise. The ones betting big on duration have been unable to prune their portfolio maturities within this short time frame (after all, you have to find counter-parties foolish enough to buy long-term bonds!)

As they were caught on the wrong foot, the capital gains on their long-term G-sec and bond holding swiftly turned to capital losses. Long-term gilt funds, income funds and dynamic bond funds were predictably the worst-hit. As the recent capital losses ate away a good portion of the interest they earned, their returns have plummeted to the 2 to 5 per cent range in the last one year. Short-term debt categories have suffered less of a battering because lower-duration bonds suffer lower capital losses when rates rise. Plus, they get to benefit from rising rates by hopping onto new bonds as their older securities mature.

Why your debt fund is losing money and what you should do