In the Gilt Medium & Long Term category, for instance, three out of 52 schemes managed to end in the green in July. Similarly, five out of 102 schemes in the income fund category and two out of 67 schemes in the short-term bond category managed to clock positive returns. The returns of all these categories were eroded the most in July, with average category returns of -3.7%, -2.5% and -1.4%, respectively.
Liquid funds was the only category where all schemes managed to end in the positive territory. This was despite the fact that the category had seen significant asset outflow last month as investors pulled out money owing to liquidity pressures.
In the Gilt Medium & Long Term category, Sahara Gilt, Escorts Gilt and Taurus Gilt were the three top performers in July with returns of 0.63%, 0.55% and 0.41%, respectively. In the income fund category, ICICI Prudential Long-term Reg (0.61%), ICICI Prudential Long-term Premium (0.59%), ICICI Prudential Long-term Ret (0.56%), IDFC All Seasons Bond Regular (0.48%) and Sahara Income (0.48%) were the five schemes that gave the best returns. In the short term bond category, Peerless Short Term (0.3%) and Sundaram Income Plus (0.24%) emerged top performers.
Funds that maintained a lower duration respective to the category or which were broadly invested in cash managed to close the month with positive returns, said Dhruva Chatterji, senior investment consultant, Morningstar India. For instance, Peerless Short Term, a short-term bond fund, had a duration of 1.4 years at the end of June against the average maturity portfolio of 2 years for the Morningstar India Short Term Bond category.
July was a particularly tough month for debt funds as the central took steps to tighten liquidity, causing yields to rise sharply. The yield on benchmark 10-year bonds rose about 70 basis points to 8.169% at the end of July from 7.463% a month ago. One-year corporate bond yields for AAA papers rose about 100 bps to 9.7615% from 8.728% in the same period.
The sharp spike in short-term bond yields on July 16 had also led to panic selling in liquid schemes and eroded single-day returns of some income and gilt medium & long term debt funds by as much as 4%.
Bond prices and yields typically share an inverse relationship; if yields rise, bond prices fall and if yields fall, bond prices rise. The fall in bond prices affects the net asset value of debt schemes, especially those that have a mandate to invest in longer-duration papers of between five and seven years, according to experts.
The rise in yields, however, has a minimal impact on schemes that invest in papers of short maturity, which is why returns of liquid and ultra short-term funds were not impacted in June.