Returns from short-term bond funds enter negative territory

0.58 1.71 HDFC Short-term-0.03951.53.34 IDFC SSI Short-term-0.610.411.86 LICMF Short-term-0.231.073.94 Lotus India Short-term Retail-0.571.093.27 Principal Income Short-term-0.111.173.07 Reliance Short-term-0.031.323.21 Tata Short-term Bond-0.321.043.26 Templeton India Short-term
Income Retail-0.111.42.55 Sector Average0.141.453.14  In the first week of June, Santosh Agarwal (name changed) invested Rs 12.5 lakh in Templeton short-term retail income (weekly dividend investment). Yesterday, when he looked at returns on the investment, he was surprised that the value had eroded by Rs 3,000 or .25 per cent.  "I can understand that the returns have fallen because of the rise in the interest rates, but what is hard to believe is the loss in capital," says Kartik Jhaveri, director, Transcend India.  And it is not just Templeton, there are a host of other short-term funds that are giving negative returns. DWS Short Maturity tops the list with -0.66 per cent, followed by IDFC SSI Short-Term at - 0.61 per cent and Lotus India Short-Term Retail at -0.57 per cent.  However, it is not that the sector per se has performed badly. Both ABN Amro Short-Term Income Regular and HSBC Short-Term Income have returned almost 0.7 per cent over the period. And, interestingly, the sector average is .14 per cent for the one-month period under review.  Rajeev Anand, chief investment officer, debt, IDFC, said that the investor should get into such funds, at least with a three-six month perspective. He, however, refused to comment on why there was a difference in returns.  Santosh Kamath, chief investment officer, Franklin Templeton, blamed it on mark-to-market losses. "Our fund has returned 8.8 per cent in the last one year (as on June 30) despite a 172 basis point jump in the one-year yields," said Kamath.  What is surprising for market experts is that though the average maturity of the papers held by these funds are mostly between one and two years, or slightly more in some cases, they have incurred losses.  For instance, the average maturity of IDFC Fund is 1.09 years and Lotus 1.10 years. "So, the losses have to be significant for them on some papers for the value to have eroded so much," said Jhaveri.  Industry experts said that in December 2007, many short-term debt managers entered the long-term bond market, which is contrarian in itself. This is because many managers held the view that interest rates would fall in the months to come, leading to higher returns.  "However, RBI's CRR hike (the amount of money that banks have to park with the apex bank) in March 2008 caused a lot of trouble to these funds," said a mutual fund analyst.  The last time returns from bond funds turned negative was in 2003, when interest rates were going up. Dhirendra Kumar, chief executive, Value Research, said that in the next six months, one can expect lower returns from these funds. "In the near term, bank fixed deposits would give better returns to the investor," he added.