Debt fund managers chose to raise the average maturities of long-tenure bond funds in August and September despite taking a hit on their portfolio in July.
?Most of the debt fund managers either increased the duration of the bond funds or maintained the same duration in both August and September despite the fluctuation in yields,? said Dhruva Chatterji, senior investment consultant, Morningstar India. ?Taking a duration call can work both ways; it can either add a kicker to your returns or adversely impact your portfolio,? he added.
According to Morningstar India data, average maturity of intermediate bond funds category that comprises income funds rose from 5.18 years in July to 6.22 years in August and 6.40 years in September. Similarly, maturity of intermediate government bond funds rose from 8.16 years in July to 9.82 years in August and 10.14 years in September. Maturity of long-term government bond funds rose to 9.33 years in July to 10.92 years in August but declined marginally to 10.33 years in September.
?In July, the yields of 10-year government bonds had shot up too much and were ruling at over 9% levels. Since yields were expected to go down from here on, most fund managers increased the duration of their bond funds in August expecting yields to soften and even deployed cash they were sitting on till now,? said a debt fund manager, who did not want to be named.
In some ways, this move seems to have backfired as the RBI unexpectedly raised the repo rate by 25 basis points in September. Yields on benchmark 10-year government bonds rose from 7.463% at the end of June to 8.169% at the end of July, 8.609% at the end of August and 8.762% at the end of September.
Gilt medium and long-term funds have emerged the worst performers in July, August and September with returns of -3.77%, -1.55% and 0.21%, respectively, Value Research data show. Income funds were also among the worst performers in the last three months, giving negative returns in both July (-2.56%) and August (-0.59%).
Experts believe the yield movements are likely to remain volatile in the short term. However, experts reckon debt fund managers may still not cut durations by much. ?At present, the current account deficit data is much more positive, the Fed taper is not likely to happen anytime soon and the market has already priced in at least a 50-bps repo rate hike in the coming months. Given this backdrop, it does not make sense for fund managers to cut the duration, especially if they are holding a long-term view,? said the fund manager quoted above. Added Chatterji: ?In this volatile environment, fund managers have become much more active and responsive in managing duration.?