As rewards get delayed, debt funds frustrate

As rewards get delayed, debt funds frustrate
In 2012, expectations of a rate cut by RBI that could have translated into good returns for debt fund investors were kept on hold due to sticky inflation. Aggressive CRR cuts in January-March 2012 by the central bank raised hopes of a rate cut later during the year, but high inflation didn’t allow RBI to move forward. These expectations have now been advanced to January-March 2013, though optimists expect a 25 bps cut even in the central bank’s December 18 meeting.

Top performers among debt funds delivered 9.5 to 12 per cent return during the year, which were much better than the single-digit returns posted in 2011, but still quite modest compared with equity mutual funds. The top five open-ended income fund performers from long term and medium term debt categories were Kotak Bond - Plan A (Growth)-11.77 per cent, Templeton India IBA - (G) 11.12 per cent, SBI Magnum Income Fund - (G) 11.05 per cent, Reliance Dynamic Bond Fund (G) 10.97 and ICICI Pru Income Opportunities Fund (G) 10.49.

The top five open-end short-term debt fund performers were Birla Sun Life Short Term Opportunities (Growth)-10.44 per cent, Religare Short Term - Plan A (G)-10.17 per cent, UTI-Short Term Income Fund (G)-9.54 per cent, Principal Income Fund - STP (G)-9.52 per cent and Templeton India Low Duration Fund (Growth Plan)-9.49 per cent.

Jimmy A Patel, chief executive officer at Qua-ntum Asset Management Company, said while talking about the action in the debt mutual funds in 2012, “The industry has seen a marked shift from close-ended FMPs to open, actively managed short-term funds; income funds, and especially dynamic bond funds.”

Fund managers expect up to1 per cent rate cut by RBI in 2013, which could translate into a healthy return of close to 14 per cent for gilt funds.

B Sarath Sarma, executive director at IDBI Asset Management said last week after the launch of their maiden gilt fund-IDBI Gilt Fund, “Next year is going to be even better for debt funds, this year too, debt funds have posted double digit return. Every 1 per cent interest rate cut will lead to a yield of around 6 per cent and a prevailing coupon rate of 8.15 per cent on10-year benchmark government bonds, resulting in a return of 14 per cent."

Debt fund managers will be on their toes to maximise returns from money market instruments in 2013, trying to dynamically manage the duration of gilt securities in order to optimise returns.

“After all, it’s all about anticipation of a rate cut or change in the interest rate cycle, than the action that leads to rise in the secondary market yield in government securities,” Sarma said.

Lakshmi Iyer, head-fixed income & products, Kotak Mahindra Asset Management said, “Stick to long-duration fixed income fund of 12-24 months horizon.” zz

raviranjan@mydigitalfc.com

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