An increase in bond yields hurt debt funds in December, particularly higher maturity bond and government securities dedicated funds. The Morningstar intermediate bond funds category registered -0.16% return, while the intermediate and long government securities dedicated funds were down -0.2% and 0.3% respectively. On the other hand, ultra short term bond funds posted the highest returns, followed by liquid and short term bond funds.
Expectations of monetary tightening and higher inflationary pressures continued to weigh on investors’ sentiments last month. The bond yields moved up during the month as investors turned cautious with hawkish comments from the Reserve Bank of India. The inflation rate on primary articles continued to remain upbeat and spiraled upwards. It increased to 15.5% for the week ended December 19, up from 11.04% for the week ended November 14. The wholesale price index (WPI) surged to 4.78% for November 2009, up from 1.34% previous month.
Higher inflation and stronger macro economic data can result in central bank resorting to end its soft interest rate regime. Worries of higher crude oil prices owing to heightened tensions in gulf region also kept investors wary. On the positive side, the bond market took comfort from comfortable liquidity in the banking system.
The yield on the 10-year benchmark government bond increased to 7.66% in December, from 7.30% in previous month.
Debt Category Performance
Liquid
The Morningstar India Liquid fund category registered 4.77% return for one-year period ended December 2009. This category consists of funds with average maturities upto 91 days. Out of 22 funds considered for analysis, 13 funds outperformed their peers. In terms of one-year risk-adjusted return, LIC MF Liquid registered highest return. On an absolute basis, the fund posted 5.9% return.
Ultra Short Bond
The ultra short bond category with funds consisting of average maturities over 91 days but less than one year, posted 5.6% return. Out of 23 funds selected, 10 funds beat the category average. LICMF Savings Plus had the best risk-adjusted performance. The fund delivered 6.5% return on an absolute basis.
Short-Term Bond
During the one-year period, the short-term bond category with residual maturities between one- to three-years, posted 7.4% return. Out of 17 funds considered, 10 funds outperformed their peers. Templeton India Short Term Income fared the best in terms of risk-adjusted return. The fund returned 12% for one-year period through December.
Intermediate Bond
This category includes funds with maturities between three- to seven-years and registered -0.6% return, during the one-year period ended December. Out of 22 funds shortlisted, 11 funds beat the category average. Canara Robeco Income delivered the largest risk-adjusted return. On an absolute basis, the fund registered 6.8% return.
Short Government
Short government funds invest in government securities with one- to three-year maturities. For one-year period, the category delivered marginal 0.01% return. In terms of risk-adjusted performance, Templeton India Govt. Securities Treasury posted the highest return. On an absolute basis, the fund registered 3.1% return.
Intermediate Government
The intermediate government bond category includes funds with residual maturities between three- to seven-years and generated -6.3% return. Out of 12 funds shortlisted for analysis, four funds beat their category peers. The best performer in this category was ICICI Pru Gilt Treasury in terms of risk-adjusted performance. The fund posted 3.9% return for one-year period through December.
Long Government
Long government funds invest in government securities with average maturities of more than seven years. This category generated -7.5% return during the one-year period. Out of eight funds selected for analysis, only three funds outperformed their peers. Templeton India Government Securities Long Term fared the best in terms of risk-adjusted performance. On an absolute basis, the fund delivered 1.5% 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 November 2009 have been considered.