A benign interest rate environment and the Reserve Bank of India (RBI) buying back government bonds improved investor sentiment in September, thereby pushing bond prices higher. During the month, the yield on the 10-year 6.9% 2019 government bond declined to 7.19%, from 7.41% previous month. The slow pace of government borrowing also benefited the bond prices. The government has scheduled to borrow Rs 123,000 crores during October 2009-March 2010 period.
The RBI bought Rs 6,000 crores worth of government bonds, thereby putting more money into the banking system. The ample liquidity, which stood around Rs 150,000 crores, during the month, also helped the bond prices. The overnight call rate declined to 3.20%-3.25%, driven by surplus liquidity in the banking system.
In contrast, the rising inflation, as measured by the Wholesale Price Index, caused investor a concern. The annual WPI inflation increased to 0.37% for the week ended September 24, from -0.95% for the week of August 26, driven by surge in food and crude oil prices. The increasing inflation continued to be a concern during the last few weeks as weak monsoon had raised drought like concerns. The lower monsoon is likely to result in lower crops output, which could push food prices further up.
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 September, this category generated 6.3% return. Out of 21 funds considered for analysis, 11 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 7.2% 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 6.9% return. Out of 21 funds selected, eight funds beat the category average. Fortis Money Plus was the best performing fund in terms of risk-adjusted return. The fund generated 8.1% 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 9.8% return. Out of 16 funds considered, 11 funds posted better return as compared to the category average. DWS Short Maturity was ranked at the first position in terms of risk-adjusted return. The fund delivered 15.2% absolute return, during the one-year period ended September.
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 11% return, during the one-year period ended September. Out of 23 funds shortlisted, 14 funds outperformed the category average during the year. Canara Robeco Income delivered the best risk-adjusted return. On an absolute basis, the fund registered 19.4% return.
Short Government
Short government funds invest in government securities with one- to three-year maturities. For one-year period ended September, this category delivered 5.4% 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 8.7% return.
Intermediate Government
The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 13.4% return, during the one-year period. Out of 12 funds shortlisted for analysis, seven funds beat the category peers. The best performer in this category was DSP Blackrock Government Securities. The fund posted 21.9% return on an absolute basis.
Long Government
Long government funds invest in government securities with average maturities of more than seven years. This category generated 12.5% returns during the period. Out of eight funds considered, four funds outperformed the category average during the year. ICICI Prudential Gilt Investment Option fared the best in terms of risk-adjusted performance. On an absolute basis, the fund delivered 23.2% return.
Note: For the purpose of this analysis, funds have been ranked based on their one-year Morningstar risk-adjusted return; only growth options have been considered. Further, only funds with AUM of more than 20% of the average category AUM as on August 2009 have been considered.