Rise in yields hits debt, gilt MF returns

Fund managers expect further decline in income fund returns this year

A slight increase in yields has led to capital losses for those who have invested in debt and gilt funds while returns have also gone down substantially since the beginning of this year.

The returns of debt funds, which were averaging at around 9.5 per cent at the beginning of this financial year, have gone down through three per cent in the middle of the year to one per cent in the last couple of months.

Gilt funds have fared even worse. From an average return of nearly 12 per cent at the start of the current fiscal, returns have gone down through two per cent to less than one per cent.

Sandesh Kirkire, debt fund manager with Kotak Mahindra Mutual Fund (KMMF), said, "Income funds are losing money and so are gilt funds due to the huge liquidity in the system."

The debt market is highly skewed""there is a glut in the supply of long-end maturities while there is a little supply of short-end maturities. This has also led to the rather lop-sided market structure.

There has been an increase in the yields of medium and long-term gilts by around one-two basis points in the last one month.

A look at the returns of debt funds over a three-month time frame has revealed that most of the debt fund returns are averaging at slightly under five per cent. This is for the top 15 schemes.

However, for the bottom 15 schemes returns have declined by around 30 per cent.

For gilt funds the returns range between one per cent and three per cent for the top 15 schemes. For the bottom 15 schemes the returns have slipped by one-three per cent.

Debt fund managers said returns are going to be lower this year for income schemes and investors can expect returns of around 5-5.5 per cent.

Earlier this year there were expectations that the returns would be around seven per cent, though some of the schemes did manage to deliver returns of around nine per cent.

However, the increase in yields has spoiled the party for those who have stuck to debt schemes.

Fund managers, however, said that investors would have to look at a mix of debt and equity schemes in order to have a balanced portfolio and enhance their returns.

The market stabilisation bonds announced by the government may bring some sanity into the market as this will serve to suck out the excess liquidity, fund managers said.

Most of the money is now flowing away from income schemes into equity schemes though bulk of it has actually gone to enhance the assets of monthly income plans, which offer the stability of debt funds and the capital appreciation of equity schemes.