Anxious over a further hike in the interest rates, debt fund managers have cut down exposure to long-term papers. According to market sources, the average tenure of medium-term debt funds has fallen below one year. In early 2011, it used to be about 1.4 years and about 2.2 years in 2010.
Thanks to the inching up of 10-year g-sec bond yields from 8% (about a month back) to 8.37% per annum, bond fund managers are seeking the safety of short-term papers. Debt fund managers are believed to be investing in short-term certificates of deposits (CDs) and commercial papers and holding till maturity. The net asset value (NAV) of debt funds is affected by the change in interest rates and if the interest rate rises, bond prices (and therefore fund NAVs ) fall to adjust to new yields and vice versa.
Dwijendra Srivastava, head fixed income at Sundaram MF says, ?We have also lowered our average maturity in bond schemes as there are chances that interest rates have not peaked-out.? Nandkumar Surti, CIO at JP Morgan Mutual fund says, ?The bond market outlook is negative and the disinvestment programme is picking-up. Volatility in oil prices has lead to uncertainty over the issuance of follow-on public offer of oil companies.? He added that, with this kind of uncertainty, debt fund managers have lowered their average maturity to around 1 year levels in the last few weeks.
Average maturity of all the income funds in the month of April stood at 1.16 years, which was 1.44 years in Januar, 2011. In 2009, average maturity of all income schemes stood at 4.25 years which came down 2.22 years in 2010. However for some schemes like DWS Premier Bond fund, Kotak Bond Deposit and HDFC income schemes, average maturity stood higher in the month of April at around 4-7 years.
?We believe that, average maturity holding will remain low for the next 3-6 months as in the second half of the year government borrowing will be higher than what was budgeted,? added Surti. Srivastava feels it is a good opportunity for investors to look at income schemes from a long term perspective.
Income funds generally invest in fixed income securities such as bonds, corporate debentures, government securities. In the last one year, they have given lesser returns than liquid and ultra-short term debt funds. While income funds gave a return of 4.8% in the last one year, it was 6.8% for liquid funds and 6.9% for ultra-short term funds. Higher interest rates have caught many income fund managers on the wrong foot, with many schemes underperforming in the last one year.
