Active calls light up debt funds :: Business Line

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Gilt funds outdo equity indices in the September-December period

If investors in the equity market had a fabulous year, those who staked their bets on the fixed income market have been pretty well rewarded as well.

In fact, many debt funds have outperformed the benchmark equity indices in the last couple of months.

Since September 2014, returns from quality gilt and income funds have beaten Sensex returns by a wide margin.

Since September, the Sensex delivered 3.3 per cent return, while top Gilt Funds delivered 9.5-9.7 per cent returns.

This was thanks to the sudden and sharp rally in bond prices, since September, especially the 10-year government security.

Falling yields, rallying prices

Since the tightening of interest rates from July 2013 by the Reserve Bank of India, gilt funds, which till then had a good run, took a knock and witnessed steep slide in their NAVs for a couple of months.

Liquid and ultra short-term funds trumped other debt funds.

Liquid funds invest primarily in money market instruments and, hence, carry a lower rate risk than other debt funds as they invest in securities with maturity periods of up to 91 days.

But in 2014, the tide turned in favour of long-duration funds.

In fact, gilt funds have been quick to recoup their losses since the beginning of 2014, as bond prices started to rally on hopes of an economic recovery and the emergence of a stable government.

While the yields on the 10-year G-Sec started to trend lower since January, the pace quickened since September. From January till September, G-Sec yields fell close to 30 basis points.

Favourable macros in the form of narrowing fiscal and current account deficits as well as the downward trajectory of inflation meant that the markets were enthused by the prospect of significant rate cuts in 2015.

Subsequently, there was a sharp 60 basis point slide in G-Sec yields since September, slipping well below 8 per cent after the RBI’s monetary policy announcement in December.

Gilts, debt funds gain

It was, hence, no surprise that gilt funds, which mainly invest in long-term government securities, have raked in huge gains.

Top-performing gilt funds that delivered 9.3-9.5 per cent in the first nine months of 2014 were quick to cash in on the sharp rally in bond prices, delivering another 9.5-9.7 percentage points in just the subsequent three months.

Investors who bet on long duration funds fared much better than those who chose to stick with short-term debt schemes.

Top-performing gilt funds for the year include Franklin India G-Sec, SBI Magnum Gilt Fund, and UTI Gilt Advantage that delivered 19-20 per cent in the last one year.

These funds took active call on interest rates and increased the duration of their funds to cash in on the rally.

Consistent schemes such as L&T Gilt and IDFC G-Sec have given 16-17 per cent return in the last one year.

Both funds have been taking active calls on duration in the past to weather tough times as well as to cash in on opportunities. These funds significantly upped their duration from four to five years in the beginning of 2014 to seven-eight years by the end of the year.

Income funds too, which capitalise on interest receipts, have fared well. The yields on AAA rated one-year corporate bonds have fallen by 75 basis points in 2014, while AA rated bonds have fallen by 50 basis points.

Schemes such as ICICI Pru Long Term Plan, ICICI Pru Income, HDFC High Interest and Birla Sun Life Income Plus delivered 16-19 per cent returns in 2014.