Gilt short-term funds (9.5%), liquid funds (8.8%) and ultra short-term funds (8.7%) emerged as the best performers in CY13, data collated from Value Research show. Gilt medium & long term, the best performing category in 2012, were the worst performers in 2013 with returns of 3.44%. Most debt categories gave over 9% returns in 2012.
While the year began on a positive note for fixed income investors with expectations of policy easing leading to a fall in rates across the curve, the second half turned volatile as RBI intervened to stem rupee's slide. The benchmark 10-year yield which started the year at 8.05%, touched a low of 7.11% in May, rose to a high of 9.24% in August and ended the year at 8.825%.
Long-term bond funds took a big hit in the third quarter of the calendar year 2013 as the central banks measures to tighten liquidity to curb the rupees fall and an unexpected hike in the key policy rate in September led to a spike in yields which, in turn, affected returns.
Gilt medium & long-term funds emerged worst performers for the three months to September 2013, with average category returns of 4.9%. Income funds also ended the quarter in red, with average category returns of -2%. Ten-year bond yields rose by about 127 basis points to 8.736% at the end of September from 7.463% at the end of June. Total debt assets for the industry fell 4% in the quarter.
Going forward, experts believe the short end of the yield curve is likely to benefit from easing liquidity conditions in the coming months. Investors with a short to medium term view should look to invest in short duration funds, said Chandresh Kumar Nigam, MD & CEO, Axis AMC.
However, Nigam believes those with a medium to long-term view should look to invest in longer duration funds as yields are likely to fall as the market prices in a change in stance of the central bank. As long as inflation behaves in line with expectation, we are unlikely to see a large rate action. This should allow the long bond to rally and yields to drop over a period of time, said Nigam.
Liquid funds and ultra short-term categories have given exceptionally high returns in the last two years and investors should temper their returns for 2014. However, other categories could give decent returns if interest rates decline, said Vidya Bala, head, mutual funds research, FundsIndia.com.