The performance is likely to continue as long as RBI’s reversal in monetary policy stance remains.
With softening bond yields, gilt funds have emerged as the biggest beneficiaries over the past month. With intermediate and long-term government bond categories posting returns in excess of three per cent, fund managers say as long as the Reserve Bank of India’s reversal in monetary policy stance remains, the better performance is likely to continue.
In its latest mid-quarter monetary policy review, RBI had left interest rates unchanged. It also reiterated the guidance given in its second quarter review, that further rate increases might not be warranted. The yield on the benchmark 10-year bond has retracted from almost nine per cent in early November to 8.3-8.4 per cent presently.
| IN THE WEAK MARKETS Performance of bond fund categories in India (as on December 16) | |||
| Morningstar category | One month | Three months | Year-to -date |
| Long-Term Government Bond | 3.15 | 2.19 | 5.52 |
| Intermediate Government Bond | 3.02 | 2.40 | 6.19 |
| Intermediate Bond | 2.18 | 2.51 | 7.96 |
| Short-Term Government Bond | 1.21 | 2.07 | 5.83 |
| Short Term Bond | 1.08 | 2.33 | 8.64 |
| Ultrashort Bond | 0.73 | 2.13 | 8.22 |
| Liquid | 0.70 | 2.13 | 8.06 |
| Source: Morningstar Direct | |||
According to a report by fund tracker Morningstar India, a number of gilt funds have increased their average maturity by investing more in longer-dated securities, to capitalise on the fall in bond yields. Most of the schemes have been increasing their average maturity gradually, to an excess of eight years.* These include ICICI Prudential Gilt, Principal G-Sec Investment, HDFC Gilt, SBI Magnum Gilt and Tata Gilt. Gilt funds outperform in years where interest rates fall and can deliver negative returns at times when interest rates rise sharply.
Dhrva Raj Chatterji, senior research analyst at Morningstar, says, “Typically, gilt funds benefit the most when yields or interest rates fall. They make an obvious choice for investors looking to capitalise on the recent change in the interest rate environment.”
“The bond yield curve has come down recently, which has helped bond funds,” says the head of debt funds at a foreign mutual fund house. However, he cautions that if at any time the yield goes up, the benefits being seen now may not be there. He admits bond funds have increased their maturity period but says one cannot stretch it beyond a point.
Further, it is not only gilt funds which have benefited from the declining bond yields. Intermediate and long-term bond funds and dynamic bond funds also benefit. Dynamic bond funds made the first move in increasing their portfolio maturities, says the report. “This has helped many of these funds to outperform other traditional income funds in the recent past,” adds Chatterji.
Intermediate and long-term bond funds and dynamic bond funds also benefit. Dynamic bond funds made the first move in increasing their portfolio maturities, says the report. "This has helped many of these funds to outperform other traditional income funds in the recent past," adds Chatterji.
Of the top 20 performing intermediate bond funds, eight are dynamic. Dynamic bond funds could turn out to be a suitable alternative for retail debt investors who do not want to be bothered with the choice of taking a view on interest rates. These funds, by their inherent name, are funds which allow flexibility to the manager to actively manage the duration of the fund, depending on the interest rate environment.
