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Bond funds slip on profit-taking

With bonds posting supernormal gains on the back of two successive rate cuts, profit booking was natural fallout and has hit the NAVs of debt funds. Yet, fund managers have a bullish outlook.

After equities, it is now the turn of debt funds to turn volatile as bonds lost anywhere between 75 paise to one rupee on Monday. Hit by a wave of profit booking after the sharp run up post-budget, the basket of open-end debt funds lost an average 0.16%, while the losses in government-securities or gilt dedicated funds was sharper, which lost 0.64%. Yet, the drop has not erased all the gains and debt funds are net gainers from their pre-budget levels.

"Unlike equities, bonds simply nudge their way up. Thus, when gains of Re 1 to Rs 1.5 come in a matter of few days, everyone would like to pocket the profit,'' says a fund manager.

Bond prices had witnessed an unprecedented rally last week after the budget slashed interest rates on small savings by 100-150 basis points. This was immediately followed by a cut in bank rate by 0.5 per cent. The benchmark 11.30%, 2010 gilt saw its yield drop from around 11% late last year to a historic low of 9.60%.

"The gilt yields had reached an all-time low in the living memory post-liberalisation and this was clearly unsustainable,'' says Nilesh Shah, CIO, Templeton Mutual Fund. With an across-the-board selling, the yield on the 2010 benchmark security rose to 10.06%. "The market was already expecting a rate cut and it had largely been factored in the prices. Yet, when the rate cut came, it was an abnormal spurt and profit booking was expected. Prices will now consolidate at current levels,'' says Dhawal Dalal, fund manager, DSPML Bond.

Among the top losers were Zurich India High Interest, PNB Debt and ANZ Grindlays Super Saver Income Fund, which lost an average 0.49%. The sharp losses are attributed to their high exposure to longer-dated government securities. For instance, Zurich India High Interest had 54% of its assets in gilts on February 28. Since gilts are most liquid debt instruments, they are impacted the most when there is a buying spree or a selling melee.

The Monday aberration notwithstanding, fund managers are bullish going forward and expect a CRR cut in April. Yet, most bond funds are pruning their portfolio maturity (average life of a bond in the fund) and have increased their allocation to more liquid assets. Last year, funds had come under redemption pressure as corporates withdrew investments in March before the fiscal-end and an encore is expected. "March can be bit of a dampener on account of profit booking by banks and primary dealers. But the outlook is positive going into next year. We plan to cut the portfolio maturity slightly and rebuild it towards end of the month,'' says Sanjay Garodia at Prudential-ICICI. Adds Shah at Templeton," We will now be looking to cut portfolio maturity as everything we wanted has been delivered. The outlook is positive as liquidity is very, very healthy. Budget has been very positive and forex reserves are at an all-time high."

Mori-Bond
    02/03/2001  05/03/2001  % Change
  Zurich India High Interest 16.02 15.93 -0.56
  PNB Debt 12.9 12.84 -0.47
  ANZ Grindlays SSI 10.92 10.87 -0.46
  K Bond Deposit 11.726 11.68 -0.39
  K Bond Wholesale 11.846 11.8 -0.39
  Sundaram Bond Saver 15.04 14.99 -0.33
  Birla Income Plus 19.55 19.49 -0.31
  Sun F&C Money Value Bond 13.11 13.07 -0.31
  Pru ICICI Income Plan 13.85 13.81 -0.29
  HDFC Income 10.85 10.82 -0.28