Bonds/government securities, which had been witnessing a sharp rise until last week, are now witnessing a fall in prices. This would have come as an unpleasant surprise to investors who had perceived that the bull run in bond prices was always going to go on.

As an investor do any number of queries on debt (both bond and gilt) funds and the results that are thrown up are sufficient to make investors a beeline for these schemes. Bond/gilt net asset values (NAVs) have been witnessing a sharp appreciation over the last 3-12 months and even the reports in business dailies give investors the impression that these funds are low risk, high return investments. However, its rarely as simple as that and investors are either never informed or ignore the pitfalls of interest rate volatility the most telling factor affecting debt fund performance. 2003 has begun on a volatile note already  will it continue going forward?

Hit by volatility

Income Funds (Long Term)	NAV (Rs)	1-Wk	1-Mth	6-Mth	1-Yr	3-Yr	Incep.
GRINDLAYS DYNAMIC BOND	10.89	-1.7%	0.4%	8.4%	NA	NA	9.70%
TEMPLETON IBA INST	10.72	-1.3%	0.4%	NA	NA	NA	8.30%
PRU ICICI FLEXIBLE INCOME PLAN	10.73	-1.3%	1.0%	NA	NA	NA	8.40%
GRINDLAYS SP SAV G	14.34	-1.0%	0.3%	9.0%	14.4%	NA	16.20%
CHOLA TRIPLE ACE G	20.93	-1.0%	0.3%	8.4%	14.2%	13.7%	13.50%
IL&FS BOND G	15.75	-1.0%	0.4%	9.2%	15.5%	14.0%	13.90%
JM INCOME G	24.23	-1.0%	0.6%	9.0%	15.8%	15.5%	12.50%
ZURICH I HIGH INT G	21.05	-1.0%	0.3%	8.9%	15.4%	14.5%	13.80%

(NAVs as on Jan 30, 2002. Growth over 1-Yr is compounded)

Over the last 3-4 days, bond prices (both corporate debt and gsecs) have fallen sharply largely due to the nervousness stemming from war fears. And bonds at the longer end of the yield curve (i.e. maturity over 7-8 years) have been affected more than the bonds at the shorter end of the yield curve.

A lot of fund managers had turned optimistic on the interest rate front over the past few months and had accumulated bonds with maturities exceeding 7 years. This is mainly due to the fact that such bonds tend to appreciate more with softening of interest rates. But they also tend to fall more sharply on nervousness on the economic/political front, as was the case this week. Moreover, debt fund managers also tend to hold higher gsec allocations as the gsec market is more liquid, gsecs allow the fund manager to make adjustments to portfolio maturity far more easily and trading profit in gsecs can be significant vis-à-vis corporate bonds. However, gsecs also tend to react more sharply to negative news than corporate bonds.

Investors need to keep certain factors in mind while investing and not get carried away by the good performance of an investment. One factor that must demand their attention is the impact of inflation on investments. Another factor that investors need to consider while investing is that investing may not always be smooth sailing and in this volatile environment investing can be a demanding task.

Most importantly investors need to be tuned into what is happening around them. Track your investments regularly, be aware of what is happening around you, consult your investment advisor and ask him if you need to review your decisions in light of an adverse development.

 

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