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Mayhem on Bond Street

Though the past month has been a nightmare for bond fund investors as the average income fund lost 1.14 per cent, investors are advised to stay put and be patient

With the stock markets reaching a new high continuously for the last few months, equity fund investors are laughing their way to the bank. But bond fund investors are going through the worst of times. Over the past month, the average income fund has lost 1.14 per cent. For individual funds, the losses range from 0.21 per cent to 1.81 per cent.

What has led to this mayhem in the bond markets and the resulting panic among bond fund investors?

Going back in the recent past, bond markets were extremely bullish in the run-up to the credit policy. Most fund managers and bankers were expecting a cut in the bank rate. By October 16, the 10-year benchmark had hit an all-time low of 4.97 per cent. And then in just a month, the benchmark yield climbed to 5.18 per cent by November 18. RBI's attempts to curb the sharp fall in yields during October, the disappointment over the monetary policy which kept the interest rates unchanged and the recent comments by RBI on liquidity management and interest rate risk have made the debt markets nervous. An interest rate hike by central banks in other countries like the UK and Australia and the fears of a pick-up in the domestic economy leading to a rise in interest rates have contributed to the downswing in gilt prices.

More recently, the SEBI guidelines on the compulsory listing of bonds and the ceiling of unlisted bonds that can be held by banks has also created an environment of uncertainty. Also, it is not clear whether mutual investments made by banks will also come under the purview of unlisted bonds, and this has led to more panic in the corporate debt market.

Now as gilts have turned volatile, funds that had a high allocation to gilts and high portfolio maturity have suffered the most. We consider the returns during October 16 to November 18--a period over which gilt yields moved sharply.

Obviously, gilt funds were the worst losers among all debt fund categories. The average gilt fund lost 2 per cent during this period. Some of the worst losers were DSPML GSF Longer Duration (-3.27%), First India Gilt Fund (-2.98%), JM G-Sec Regular (-2.76%). Not many funds changed their bullish stance and hence didn't tinker around with the portfolio maturity during October. The average maturity for the category remained around 11 years as per the September and October disclosures.

Bond Fund Report Card During Oct 16- Nov 18
Medium-to Long term Gilt Funds*
Losers  Returns  Avrg Maturity (yrs)
DSPML GSF Longer Duration -3.27 15.06
First India Gilt Fund -2.98 12.68
JM G-Sec Regular Plan -2.76 13.04
Templeton India GSF -2.64 13.49
Least Losers    
Chola Gilt Investment 0.29 11.15
ING Gilt Portfolio -1.05 3.64
Alliance GSF Long-term -1.08 8.22
JM G-Sec PF Plan -1.72 10.55
* Funds with less than Rs 10 cr assets excluded

Of the 10 income funds, which had the highest average maturity on October 31, five of them are among the top 10 losers. These are: Templeton India Income Builder (-1.57%), DSPML Bond Retail (-1.60%), IL&FS Bond (-1.61%), JM Income Fund-G (-1.66%) and Deutsche Premier Bond Regular (-1.78%). However, the biggest loser was Chola Triple down by 1.81 per cent, in spite of it reducing its average maturity from 7.23 years to 6.75 years in October.

Income Funds
Losers  Returns  Avrg Maturity (yrs)
Chola Triple Ace -1.81 6.75
Deutsche Premier Bond Regular -1.78 7.36
ING Income Portfolio -1.76 6.80
JM Income Fund-G -1.66 7.55
Least Losers    
Grindlays SSI Medium-term  -0.21  1.62
SUN F&C FISF Long-term  -0.63  5.62
LIC MF Children's Fund  -0.70  3.30
Sun F&C Bond  -0.81  4.66

What Should You Do
For those who invested recently, the losses may come as a big shock. But let's go down memory lane to recall the volatility during January and February 2003, when the loss over three weeks was much severe than this time. The average bond fund lost 3.22 per cent and the average gilt fund fell 5 per cent. But within less than a month, these losses were recovered.

So the bottomline is to stay put and be patient. Selling at a loss is the worst thing one can do to his investments. These turbulent times send a message--that investing in bond funds isn't risk-free at all. The ups and downs are bound to be there and your investment horizon should match the type of fund you are investing in. Moreover, choose a fund that doesn't take exceptionally high interest rate risks and is low on expenses. A fund that comes expensive could look worse in bad times.