In a bear market, taking shelter in bonds has been the ideal choice, going by the returns generated in the last one year by mutual funds investing in short-term bonds. Over a one-year period, even as equity benchmark indices BSE Sensex and CNX Nifty lost 14 per cent in value, a few short-term income funds clocked returns as high as 15 per cent.
Short-term income funds managed an average return of 8.1 per cent in the last one year. The top performing funds such as Sundaram Select Debt Fund and Peerless Short Term, Escorts Short Term generated returns of 13-15 per cent.
Even as interest rates trended up for most part of the year, short-term funds benefitted from the tightening liquidity and demand for debt which kept short-term interest rates quite high. Longer tenor government securities and corporate bonds saw price erosion due to the rising interest rates.
Short-term income funds invest in a mixture of certificate of deposits and commercial paper with terms of 3-6 months. Mostly corporates park their surpluses in mutual fund debt schemes compared to bank deposits, as they tend to be more tax efficient.
Asked how short-term funds managed high returns, Mr Dwijendra Srivastava, Head of Fixed Income, Sundaram Mutual Funds, said it was due to a combination of higher returns and capital appreciation at the time of redemption.
“After March, CD rates had risen to an all-time high and most schemes invested in the 6 months to one year CDs to benefit from them,” he said. He also said that short-term corporate bonds offered rates that were 350 basis points higher than the repo rate at that time. In the later months as spreads narrowed, there was a capital gain on these holdings giving double-digit returns during that period. Most short duration funds maintained duration of 0.5 years to 1 year, where the gains were highest, he added.
Has the good show by short-term income funds helped companies earn better “other income”?
Asked how much companies benefitted from rising interest rates, Mr Bekxy Kuriakose AVP –Fixed Income L&T MF, said, “Most corporates have not benefitted as their interest costs have gone up due to higher rates on their borrowings. However, companies sitting on cash and those which have invested in high yield FDs, FMPs, ultra short-term and liquid funds would have benefitted from the current high interest rates”.
Periods where income funds have generated double digit returns have not lasted too long in the past.
So asked how long high returns can be sustained, Mr Srivastava said, “In India, interest rate cycles are closely linked to the central bank action. In the recent past the cycles have become shorter due to stronger global linkages and faster transmission.
“This interest rate hike cycle has been on for more than 18 months and is likely to be coming to an end. It is likely that we may see a pause in the cycle sometime soon. The higher returns in short-term income funds can sustain for the next 3 to 6 months.”