Riding high on IMD induced stability and the unexpected rate cut by Federal Reserve, returns are flowing from the barrel of debt funds. The 33 bond funds have generated an average annualised return of 16% for the 3 months ended January 16, 2001.
17-Jan-2001 •News Desk
Its nothing short of "manna from heaven" for bond fund investors. Riding high on IMD induced stability and the unexpected rate cut by Federal Reserve, returns are flowing from the barrel of debt funds. The Value Research category of 33 bond funds has generated an annualised return of 16% for the 3 months ended January 16, 2001. No wonder, asset management companies have simply done away with loads in bond funds and new investors are joining in hordes. For instance, Templeton India Income Fund, which is available on a no-load basis till January 31, 2001, has seen its assets under management gallop from Rs 1270 crore on December 29 to around Rs 1600 crore this week. Investments are also shifting from cash to debt funds, where investors had parked money in mid-2000 as debt markets turned volatile.
Fund managers have also increased the average maturity of the portfolio to capture a sharper appreciation in prices at the long end of the maturity curve. This has meant a higher allocation to government securities, which, unlike corporate debt, are available for a longer tenure and are also highly liquid.
"The investment strategy going forward would certainly be that of maintaining longer duration. The investment in corporate bonds would have a maximum maturity of 5 years mainly because there is hardly any liquidity beyond 5 years, while gilts would be largely at the longer end with the exposure between 40 to 50%,'' says Sandesh Kirkire, fund manager, K-Bond. The fund had an average maturity of 4.63 years in December-end. Fund managers are now banking on an interest rate cut by the central bank to fuel a fresh round of rally in bonds. The strong FII inflows and a surge in the rupee against the dollar coupled with stable oil prices has also dispelled fears on the forex front. " The market is expecting a cut in the interest rates in the short run. A trigger for the same could be a further cut in the interest rates in the US,'' points our Kirkire. Adds Rajiv Anand at ANZ Grindlays Mutual Fund,'' With the Fed reducing its rates, the differential between Indian and US rates has widened further and we believe, this leaves more room with the RBI to cut Indian rates in the future.''
Surely, the going is good in the next few months with positives outweighing negatives by a wide margin. "The outlook is fairly positive on interest rates with lower credit pick up, fiscal deficit under control, easing US Fed rates and inflation under control after 2 months,'' says Nilesh Shah, CIO, Templeton Mutual Fund. Sashi Krishnan at Cholamandalam Cazenove echoes a similar sentiment,'' We are looking to increase gilt weight in our bond funds as we see a stable interest rate regime in the short/medium term and we would also take advantage of any rate cuts by RBI.''
However, there is one external factor, which could be a potential trouble spot. "There could be problem if the US economic slowdown results in crash in south east Asian currencies and rupee comes under pressure like 1997,'' Shah strikes a word of caution.
While the turnaround in bond markets has been remarkable, investors must learn to overlook these short-term cycles and stay invested during the longer haul. If you withdrew investments from bond funds in panic after the debt bloodbath in 2000, you would be feeling foolish today. Similarly, investors today are flocking to debt funds with AMCs doling out no-load periods. However, this attempt to time the markets could again boomerang on investors. With the markets now exposed to a number of factors, investors should enter with a clear investment horizon. Thus, if you want to invest for the short-term put money in a cash fund. On the other hand, opt for a bond fund only if you plan to stay invested for a longer tenure. Else, you could end up with a loss since any adverse development can mar your returns!