Tackling Diminishing Returns

It has been a great and glorious party. In all probability it is now over. The year-to-date returns of medium-term debt fund category have come down to 2.81 per cent as on June 11, 2003. On an annualised basis, this means a return of just over 5.5 per cent. Even with some trading on government securities, fund managers can push returns into the region of 6 to 7 per cent. And this is exactly what they have been shouting themselves hoarse about in recent months. This is a far cry from the 15 per cent plus returns that we have witnessed in the past two years. But then the yield on the benchmark ten-year paper fell by 186 basis points in 2002 and 300 basis points in 2001. This year a 50 basis points fall is all that is expected. These falling yields were the driving force for debt mutual funds. As interest rates moved down, older papers carrying higher coupon became more attractive. Funds traded on these papers to generate returns far in excess of the meagre coupon. But with any further fall being limited, the scope for trading profits is low. Bond markets are returning to a situation of normalcy where coupon income is the main source o

This article was originally published on June 12, 2003.