If you had put your money in debt funds in fiscal 2002 and 2003, you would have earned an awesome 15-17 per cent. If you had stuck around last year, you would still have made decent money. |
But if you didn't bail out, lulled into believing that nothing could spoil the party and that all you had to do was pocket the dividends since the capital would remain intact or appreciate, the battering of bond schemes in the last three months must have come a rude shock. Debt funds, this year, are turning out to be big losers. |
Sample this: the average loss on long-term gilt schemes in the one week ended June 25, 2003, was a shocking 40 per cent with some schemes losing more than 50 per cent. |
The average loss for the month ended June 25 was about 23 per cent, no less comforting, while the three-month return was a negative three per cent. |
While gilt schemes may have been the worst hit, income schemes didn't fare too better either. The average fall for the same one week was 32 per cent, while for the month it was 18 per cent. Those of you who had held on for a year earned an average 3.8 per cent, with practically no scheme yielding more than 5 per cent. |
The bond markets failed to anticipate the extent of the rise in the ten-year bond yield, which moved up by about 80 basis points from a low of about 5 per cent in April to about 6.06 per cent currently. |
The bond markets, expecting a fall in the Reserve Bank of India repo rate, were instead aghast to find the central bank taking a neutral interest rate stance. There was mayhem in the markets, bonds got battered. |
The only way you could have escaped relatively unscathed was if you had smartly shifted into floaters or floating rate funds, liquid funds and a few of the short-term income funds. |
Now, fund managers appear to be recovering from the bad run. Portfolios have been rejigged and realigned to counter any further rise in rates. For instance, the maturity of long-term portfolios are down from eight to nine years to between four and five years. Short-term income funds have seen portfolio maturities down from 24 months to between 15 and 18 months. |
KEEPING OFF INCOME, GILT PLANS With plenty of money sloshing around in the financial system, the consensus among bond market players is that there is unlikely to be a steep rise in interest rates for now. |
As Dhawal Dalal, vice-president and head- fixed income, DSP Merrill Lynch Fund Managers, observes, Bond Market participants are preparing themselves for a possibility of gradual upward movement in interest rates." |
However, with inflation having hit the 6.5 per cent mark and oil prices showing no signs of easing, the chances of interest rates surprising on the upside cannot be ruled out totally. |
Which is why, though it may seem somewhat late in the day to move out of pure income funds and gilt funds, one need not pull out of the debt market altogether. |
Sameer Kulkarni, vice president & head-fixed income, Franklin Templeton Asset Management, feels that for a six months horizon, the yields on debt paper look attractive and moreover, the interest rate risk is not too high. One can still stay in by switching to an MIP and also putting away a small amount either in a floater or a liquid scheme. |
That appears to be the best route to recouping one's losses. If you are totally disillusioned and want to trade returns for safety, you may be better off with RBI Relief Bonds or post office savings. |
Or you could simply stick to good old-fashioned fixed deposits, which, incidentally, are giving you negative returns, now that inflation is at 6.5 per cent. |
But for those of you willing to give it another chance, here's what fund managers are saying: steer clear of pure income and gilt schemes for the time being, since these are more vulnerable to rises in bond rates, instead try out a monthly income plan (MIP). |
Says Dalal, "It makes sense to switch even now, even if one has to cough up an exit load. It also helps that neither MIPs nor floaters call for an entry load." |
MIPs are products that park most of their corpus (80 per cent on an average) in corporate paper, treasury bills and cash, with the balance invested in equities. Moreover, the equity portion could act as a kicker, pushing up the returns. |
Says Nilesh Shah, chief investment officer, Prudential ICICI AMC, "We are expecting Sensex earnings to be 15 per cent in FY05 and 12 per cent in FY06. And assuming a P/E ratio of 11, it should provide a return of 13 per cent. If there is a re-rating of the equity markets and it commands a higher P/E, the returns will be even better." |
According to Shah, MIPs should be able to generate returns of around 15 per cent in the long term. In a somewhat uncertain interest rate environment, the attractive equity valuations might do the trick. |
Most fund houses offer variations of MIPs with varying percentages in equities, ranging between five and 25 per cent to suit your risk appetite. |
DSP Merrill has gone so far as to offer an option "" rightly called Aggressive "" which puts as much as 30 per cent of the corpus in equities. |
Floaters are another good place to park your money in the short term, given that you don't know how interest rates are going to move. |
As Dalal observes, "These schemes carry a very low interest rate risk, since they invest in paper which carry floating rates of interest that are usually reset every six months." |
Not surprisingly, these schemes have done well in the last three months and the trend should continue. |
Fund managers don't seem to be worried about the availability of good paper to buy; they say there is enough to go around. |
Already, market estimates say around Rs 8,000 crore has found its way into floaters, both the long-term and the short-term varieties. |
And more schemes are on the way. Franklin Templeton has launched a hybrid product "" a fund of funds scheme "" which puts bulk of the money in its own floaters and the balance of about 20 per cent in its equity schemes. |
The other option , if you're keen to stay put in the debt markets, is liquid funds. |
These invest in short-term instruments such as treasury bills, certificates of deposits, commercial paper, cash and floating rate paper. Once again, you are, to a large extent, hedged against any nasty spikes in the interest rate. |
These schemes have turned in average returns of just over 4 per cent in the last three to six months. |
So, if you're not completely disenchanted with debt, these too could turn out to be a good parking place. Meanwhile, watch which way the rates go. |