Ultra short-term funds and liquid funds gave average category returns of 9.2% and 9.02%, respectively, data collated from Value Research show.
Gilt medium- and long-term funds were the worst performers, giving returns of 3.2%, followed by income funds (5.6%). Both the categories had been top performers in FY13 with double digit returns.
Yield on benchmark 10-year bonds rose about 80 basis points to 8.803% at the end of March this year from 7.963% a year ago. The turning point for the duration funds was a sudden spike in MSF rates in July following the rupees steep depreciation against the dollar and the selloff in the debt market by FIIs, said R Sivakumar, head of fixed income and products, Axis MF. Schemes with longer maturity durations suffered the most, added Vidya Bala, head of mutual funds research, FundsIndia.com.
Returns on gilt medium- and long-term and income funds slid 2-4% in July as the yield on benchmark 10-year bonds rose about 70 basis points to 8.169% at the end of July from 7.463% month-on-month. According to experts, some funds reduced their maturity duration after July, realising that interest rates weren't going to fall any time sooner. Schemes that didn't cut their maturity profile suffered more as the RBI governor subsequently raised interest rates thrice in the fiscal.
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 on liquid and ultra short-term funds were not affected in July. The underlying portfolio of liquid and ultra short-term funds invest in lower maturity papers, which have done better in a rising interest rate environment, said Dwijendra Srivastava, head of fixed income, Sundaram MF.
The shorter maturity gives investors the opportunity to deploy their redemption proceeds in papers of higher yields.
Going forward, experts suggest that debt investors with a 18-24 month horizon can look at duration funds. However, those averse to volatility should look at accrual funds such as liquid, liquid plus funds or low-duration short-term income funds.