Bonds push debt fund returns down

The sharp spike in bond yields after the RBI increased overnight lending rates has pushed long-term debt funds deep into the red. The recent fall has pulled down gains by almost half for these funds.
Medium to long-term gilt funds, which generated double-digit returns in the last one year, the best performance in the fixed income category, have been the worst hit.Their yearto-date gains, which stood at 6%-7 % at the end of May, have slumped to a mere 3% now.
“Long-term bond yields have shot up by 1% and are at levels seen about a year ago,” said Dhruva Raj Chatterji, senior investment consultant, Morningstar India, an investment research firm. “Investors have to moderate their expectations on returns, especially in duration bond funds,” he said.
Even short-term debt funds and gilt funds have posted declines in the one-month and three-month time frame. Short-term debt funds and medium to long-term gilt funds have posted 0.2% to 2% declines in the threemonth period. Income funds recorded a 2.5% decline in the past one month, the worst performance in the fixed income category.
Liquid funds and ultra short-term debt funds, which invest in securities of shorter duration, have however managed to stay in the green. They have in fact generated returns in excess of 8% for the one-year period.
Yields on the benchmark 10-year bond surged 52 basis points (bps) or 0.52% on July 16 to move past the 8% mark after the RBI announced its liquidity tightening measures to arrest the sharp fall in the rupee sending bond prices down by 3.5%. It is now quoting at around 8.2% now. Bond prices and yields are inversely related. A fall in bond prices adversely affects returns from bond and gilt funds.