• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Suresh Krishnamurthy

AFTER about two years of relentless rise in values, the net asset values (NAVs) of debt mutual funds have fallen in the last couple of months. They have declined by about 0.7 per cent, on an average, in the last month.

Mutual fund unit-holders now have no option but to hold on to these schemes to recoup the losses. In addition, given that the prospect is for stable interest rates, holding on to the units is better compared to exiting now.

In any case, investors who entered with the intention of holding on for more than 12 months have nothing to worry. For them, the losses are irrelevant. It is quite likely that when they exit these schemes, the yield on their investments will be as much as 5.5 per cent.

This was the indicative yield to maturity on most schemes a month back.

However, it is a different cup of tea for unit-holders who invested with a short-term perspective of three to six months. They need to hold on or exit with less than expected returns on their investment.

Poor show: When prices of debt securities decline, NAVs of plain vanilla debt mutual funds can be expected to record depreciation. However, debt mutual funds have underperformed their benchmark, Crisil Composite Bond Fund Index.

On an average, debt mutual funds have declined by 0.7 per cent while the Index declined only by 0.5 per cent.

The under-performance of debt mutual funds is mainly due to the large investments in government securities and their high average portfolio maturity.

For instance, a fund such as Templeton India Income Fund had close to 50 per cent of net assets parked in government securities. The yields on long-term government securities have risen by about 0.25-percentage point in the last couple of months.

It is therefore not surprising Templeton India Income Fund, one of the better performers, has seen its NAV decline by 0.47 per cent.

Reversal of losses: These losses, however, do not matter for longer-term investors. As they hold on to the units, the losses will be recouped in the form of higher accrual of income if interest rates continue to remain stable.

For instance, if you entered last month expecting a yield of 5.5 per cent in the next 12 months, this decline of 0.5 per cent in net asset value will ensure that your yield will only be about 4.9 per cent after 12 months.

However, if you held for 18 months, the yield would have automatically increased about 5.5 per cent.

Importantly, this 18-month period is only if there is no fresh inflow into the funds.

Since there will be fresh inflow into the funds which, in turn, will be invested in higher yielding assets, losses will be recouped much sooner. In funds with sizeable increase in inflows, losses may be recouped even within nine months.

In this context, investors who entered recently should at least hold on to these funds for the next six to nine months. Otherwise, their returns could be much lower, at even less than 2 per cent.

Article E-Mail :: Comment :: Syndication

Stories in this Section
The principal-agent problem

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line