Income funds are no longer the same product as it used to be two years back. Though 2003 was relatively sober for income fund investors (the category gained 7.65 per cent last year), 2004 is turning out to be a terrible year. Income funds are down 1 per cent till August 11. Rise in inflation and global oil prices together with two successive rate hikes in US have increased fear of a hike in domestic interest rates. This has resulted in sharp rise in bond yields (huge fall in bond prices and income funds' NAVs). The 10-year bond yield has crossed 6.5 per cent, which was 5.1 per cent at the start of the year.
All this has really changed investors' preference. In the first seven months, Income funds have witnessed a net outflow of nearly Rs 15,000 crore. Except for April (that saw an net inflow of Rs 5,000 crore), all other months have seen net outflows in the range of Rs 2000-6000 crore. In July 2004, this figure was Rs 2,160 crore. But, June's net outflow figure of Rs 6,335 crore was the highest in the past sixteen months. Prior to this, such high outflow was witnessed in February 2003, when there was increasing fear of the Gulf war, which resulted in sharp rise in global crude oil prices.
Though fund managers are trying hard to contain the fall in NAV by investing in lower maturity bonds and moving a large parts of their portfolios into cash, investors are not willing to stay with them.