The outperformance of duration bond funds was more pronounced in the second half of the fiscal year as the commitment to fiscal discipline, the RBIs open-market operations and expectations of policy rate cuts contributed to a rally in the bond markets, said Vikrant Mehta, head, fixed income, PineBridge Investments, India.
Long-term interest rates have seen a significant decline. For instance, the 10-year AAA-rated corporate bonds, which were quoting in the 9.50-9.60% range in March, are now quoting at about 8.70-8.85%. On the other hand, the 10-year benchmark yields have moved from about 8.35% to 7.85% in the last three months.
Gilt medium-&-long-term funds topped the debt category with average returns of more than 10.5% in 2012. The category had given returns of just 5.77% in 2011. Dynamic bond funds gave returns of 10.1% in 2012 compared with returns of 8.3% in 2011.
Assets of several dynamic bond funds rose about 400% in CY12 as an uncertain interest rate environment prompted investors to put money in these schemes.
Liquid funds gave returns of 9%-plus in 2012 against 8.5% in 2011. This was because short-term rates remained high for much of the year, especially between January and March, as liquidity remained tight, said experts.
The demand for fixed maturity plans (FMPs) waned as the year progressed. Interest in FMPs, especially of three-month and one-year maturity, was muted on account of low interest rates and lower issuance by banks, said Mehta.
The number of FMP launches declined from 483 in the first half of the year to 151 in the second half, while fund mobilisation dipped from R78,948 crore in the first half to under R8,000 crore for the five months ending November. Fund houses had rushed to launch as many as 315 FMPs between January and March in anticipation of a decline in interest rates. The returns of ultra short-term funds and FMPs are likely to get negatively impacted if the RBI goes ahead with rate cuts in its upcoming policy meet, according to experts.
There will be a small window of opportunity for FMP investors in the next two months, as seasonal liquidity tightness take short-term yields higher. After March, FMPs won't remain attractive as short-term yields are likely to fall, said Maneesh Dangi, co-chief investment officer, Birla Sun Life AMC. Ultra short-term funds gave returns of 9.4% in 2012 against 8.9% in 2011.
Long duration funds will benefit from rate cuts. Funds focused on corporate bonds should continue to do well. Besides, investors could also consider long-dated gilt funds, but should be ready for short term volatility owing to changes in oil prices and currency, said Santosh Kamath, CIO, fixed income, Franklin Templeton Investments. According to Mehta, duration products carry higher risks and volatility, and long-term FMPs may attract money from investors with lower risk appetite.