Better-than-expected gilt auctions cutoff, expectations of a decline in securities’ supply and surplus liquidity were the factors which boosted investor sentiment in November. Government bond prices marginally gained during the month and helped debt funds to post positive returns. The yield on the 10-year benchmark, 6.9% 2019 government bond declined to 7.26% in November, from 7.30% in October.
However, higher inflationary pressures, particularly emanating from higher food prices, kept bond prices in check. Inflation rate of food articles in the country rose to 17.47% in the week ended November 21, from 15.58% in the previous week. Primary articles inflation in the week ended November 21 rose to 12.53%, from 11.04% a week earlier.
The stronger-than-expected macro-economic data also led to fears of end of a loose monetary policy. During the month, data from the Central Statistical Organization showed industrial growth increased by 9.1% in September, as compared to 6.0% a year ago. The market had expected IIP to fall to 7.0%, from 22-month high of 11.0% in August.
Bond prices were also hit after GDP data showed economy grew 7.90% in July-September quarter, from 6.1% in the previous quarter. Market had expected 6.3% growth in July-September quarter.
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 November, the category generated 5.25% return. Out of 24 funds considered for analysis, 13 funds outperformed their peers. In terms of Morningstar risk-adjusted return, LIC MF Liquid emerged as the best performing fund. On an absolute basis, the fund posted 6.3% 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 6.05% return. Out of 22 funds selected, 10 funds beat the category average. LIC MF Savings Plus was the best performing fund in terms of risk-adjusted return. The fund delivered 7.2% 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 10.78% return. Out of 18 funds considered, 10 funds outperformed their peers. Templeton India Short Term Income fared the best in terms of risk-adjusted return. The fund posted 14.9% return during the one-year period ended November.
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.
The category registered 10.5% return, during the one-year period ended November. Out of 22 funds shortlisted, 14 funds outperformed the category average during the year. Birla Sun Life Income Plus delivered the highest risk-adjusted return. On an absolute basis, the fund registered 15.4% return.
Short Government
Short government funds invest in government securities with one- to three-year maturities. For one-year period, the category delivered 3.8% return. Out of eight funds considered, three funds outperformed the category peers. In terms of risk-adjusted performance, SBI Magnum Gilt Short Term posted the highest return. On an absolute basis, the fund registered 5.4% return.
Intermediate Government
The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated 5.4% return, during the one-year period. Out of 13 funds shortlisted for analysis, five funds beat their category peers. The best performer in this category was ICICI Pru Gilt Treasury. The fund posted 12.7% 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 4.9% return during the one-year period. Out of eight funds considered, only three funds outperformed their peers. Templeton Government Securities Long Term fared the best in terms of risk-adjusted performance. On an absolute basis, the fund delivered 13.3% 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 October 2009 have been considered.