Indian government bond yields rose in August, owing to expectations of an increase in inflationary pressures and high auction cut-offs. The large government bond supply and lackluster progress on monsoon also weighed on investors’ sentiments.
The headline inflation, as measured by the Wholesale Price Index, was -0.95% for the week ended August 28, compared with -1.54% for the week ended July 31. However, an increase in global commodity prices and a weak monsoon resulted in higher food prices and thereby led to expectations of higher inflationary pressures.
The yield on the 10-year 6.9% 2019 government bond rose to 7.09% in August, from 6.78% in the previous month. The yields on corporate bonds also jumped, tracking the rise in gilt yields. Call rates remained stable and continued to trade in 3.25%-3.50% range on stable liquidity conditions, during the month.
In the foreign exchange market, the Indian rupee depreciated against the U.S. dollar to $48.65 as on August 28, from $47.93 on July 31, owing to an increase in foreign exchange reserves, which amounted to $ 272 billion as of August 21.
Debt Category Performance
Liquid
The Morningstar India Liquid category includes funds with a residual maturity up to 91 days. Since these funds invest in very short duration money market and debt instruments, they offer minimal interest rate sensitivity and therefore, low risk and total return potential.
During the one-year period ended August 2009, this category generated 6.7% return. Out of 23 funds considered for analysis, 12 funds outperformed the category average. In terms of Morningstar risk-adjusted return, LIC MF Liquid emerged as the best performing fund. On an absolute basis, the fund registered 7.7% return.
Ultra Short Bond
Ultra short bond funds invest in investment grade debt securities that have residual maturities of less than one year but greater than 91 days.
During the one-year period, this category posted 7.4% return. Out of 14 funds selected, only three funds outperformed the category average. Fortis Money Plus was the best performing fund in terms of risk-adjusted return. The fund generated 8.6% return on an absolute basis.
Short-Term Bond
Funds in the short-term bond fund category invest in corporate and government securities with residual maturities between one- to three-years. These funds are fairly conservative in terms of interest rate risk, compared with longer duration debt funds.
During the one-year period, the short-term bond category posted 12.7% return. Out of 15 funds considered, nine funds outperformed the category average. DWS Short Maturity was ranked at the first position in terms of risk-adjusted return. The fund delivered 15.4% absolute return, during the one-year period ended August.
Intermediate Bond
Intermediate bond funds invest in corporate and other investment grade debt securities and have average effective maturities between three- to seven-years. Since these funds have higher durations, they are relatively more sensitive to interest rate risks, as compared to short term bond funds.
This category registered 14% return, during the one-year period ended August. Out of 11 funds shortlisted, six funds outperformed the category average during the year. Fortis Flexi Debt delivered the best risk-adjusted return. On an absolute basis, the fund posted 18.6% return.
Short Government
Short government funds invest in government securities with one to three-year maturities. For one-year period ended August, this category delivered 5.6% return. Out of eight funds considered, three funds outperformed the category average during the year. In terms of risk-adjusted performance, Tata Gilt Short Maturity posted the highest return. On an absolute basis, the fund registered 9.2% return.
Intermediate Government
The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 14% return, during the one-year period. Out of 12 funds shortlisted for analysis, six funds beat the category peers. The best performer in this category was JM Government Securities Regular, which registered 16% return. On an absolute basis, the fund posted 25.2% return.
Long Government
Long government funds invest in government securities with average maturities of more than seven years. This category generated 12.7% returns during the period. Out of eight funds considered, four funds outperformed the category average during the year. ICICI Prudential Gilt Investment fared the best in terms of risk-adjusted performance. On an absolute basis, the fund delivered 24.6% return.
Note: For the purpose of this analysis, funds have been ranked based on their one-year Morningstar risk-adjusted return as on August; only growth options have been considered. Further, only funds with assets more than 20% of the average category AUM as on July have been considered.