Inflation cuts debt funds' weekly returns

Except for floaters and liquid funds, all other categories of debt funds gave negative returns last week. The surge in inflation pushed down debt funds' returns, fund managers said. However, the uptrend in the stock market enabled equity funds to give better returns.

The wholesale price index inflation rose to a three-and-a-half-year high of 7.51 per cent in the week ended July 24.

With the prices of debt papers falling subsequent to the release of inflation data Friday, returns of most debt funds have fallen significantly, fund managers pointed out.

Floaters and liquid funds were the only debt categories to give positive returns last week.

The returns given by floaters for the week ended Friday was 0.09 per cent, while liquid funds generated a one-week return of 0.08 per cent.

"Amidst the interest rate fluctuations, fixed-rate securities are subject to volatility in prices. However, coupons on floating rate bonds are reset at regular intervals with respect to the underlying benchmarks. As a result, floating rate securities are less sensitive to interest rate movements than fixed rate," said a fund manager at a private fund.

The yield on the ten-year benchmark government bond Friday rose to 6.2750 per cent from its previous day's close of 6.1367 per cent, because of the big jump in inflation to 7.51 per cent.

Long-term government securities fund were the worst hit and gave a negative one-week return of 0.32 per cent, while medium-term debt funds gave a negative weekly return of 0.13 per cent. The short-term gilt funds gave a negative weekly return of 0.02 per cent Friday.

Among equity funds, fast moving consumer goods-dedicated funds topped the weekly returns charts. For the week to Friday, they posted an average return of 1.69 per cent, followed by the category of diversified equity schemes, which gave a weekly average return of 1.42 per cent.

The Bombay Stock Exchange's FMCG Index moved up to 850.41 on Friday from 846.62 points a week ago.

"Last week, the mid-caps performed well. That may be one of the reasons why the returns of FMCG funds improved. In our fund, we have substantial exposure to Balrampur Chini Mills. The stock went up by 20-25 per cent last week, that might have contributed to the returns," said Sandip Sabarwal, equity fund manager, SBI Mutual Fund.

Among other equity categories, the tax-saving equity schemes delivered an average return of 1.07 per cent for the week ended Friday. On the other hand, the equity-oriented balanced schemes generated average return of 0.93 per cent.

The pharmaceutical and technology funds gave weekly negative returns of 0.01 per cent each, while the petroleum sector funds delivered a weekly return of 0.77 per cent.

In comparison, the BSE's IT Index Friday ended at 1314.52, down 0.78 per cent from 1324.79 in the previous week. The BSE Healthcare Index closed at 2219.54, down 0.45 per cent from 2229.49, its previous week's close.

As a category, index funds delivered a one-week average return of 0.30 per cent on Friday. The Bombay Stock Exchange's 30-share Sensex Friday closed at 5196.99, up 0.52 per cent over its previous week's close of 5170.32. The National Stock Exchange's 50-share Nifty ended at 1633.40, up 1.10 points from 1632.30, it's previous week's close.