Saturday, March 21, 2009

INCOME FUNDS' NAV TOO COULD FALL.....


INCOME FUNDS' NAV TOO COULD FALL.....

A Guest asked,
"Can you pl enlighten me on what`s happening to the Income Funds ? It was considered a safe haven and I moved some of my Equity Funds into Income Funds last week. Now, to my dissappointment, the Income Fund NAVs have started falling especially in the last week and have given negative returns last week.

How do you see returns from Income Funds developing / unravelling going forward ? "

Srikanth shankar Matrubai's REPLY :

Many income fund investors were surprised to see falling NAVs in income and Gilt funds last week and the reason was
After bond yields continued to touch new lows for more than a month following monetary easing by RBI, there was a sudden turn in yield movements over the past few days after the announcement of the revised schedule for government borrowing last week. Under the revised schedule, the actual quantity of issuances for the rest of the fiscal year overshoots the government’s initial plan.

When bond supplies are tipped to rise, yields usually fall. However, despite the government’s increased borrowing intention, yields shot up this time around as the bond market had discounted further borrowings with the Fiscal Responsibility and Budget Management Act, which stipulates fiscal restrain on part of the government, having already been put on the backburner.
The yield on the 10-year benchmark paper, had risen to 9.55% in July last year. With RBI progressively cutting rates, yields started falling, hitting a low of 4.86% early last week, only to rise to 6.19% in subsequent sessions. When bond yields rise, prices fall and vice versa. This rise in bond yields have caused NAVs to drop.

Income funds hold either gilts(govt bonds) and/or other co. papers with a fixed int coupon. Dep. on the interest rate swings,likelyhood of extra bond issue by Govt (and hence fiscal rating of Govt) and liq.position the price of these papers(or bonds) vary on daily basis as they r actively traded in money mkt by inst players.So the NAV of the M.fund scheme varies.Hence its a 2 way street for the NAV of these schemes.and there there can be depreciation of original invested amt !!

Best Managed Income Funds may Grow @ 10-12% Per year by Investing in Govt.Securities & Corporate Bonds as well as FD in case Interest Rates are Falling.

In case Interest Rate start going up, these Funds may give 4-5% Returns.

In short Term these Funds may be Volatile.

In 2004 most of Funds Generated Almost ZERO or slightly negetive returns.

In 2009, one can Expect 10-15% Returns from Efficiently Managed( not all ) Income Funds. Follwing Income Funds are better Performer.

Birla Sunlife Income PLUS Fund
Canara Robeco Income Fund
HDFC High Interest Fund
ICICI Income Fund
IDFC Super Saver Investment Fund
Reliance Income Fund
UTI Gilt Advantage Fund

But with Interest Rates already fallen too much, too fast, there is very little scope for returns as specatular as seen in the last six months.
You may as well consider Arbitrage Funds.
Best of luck,
Srikanth Shankar Matrubai

Also visit http://equityadvise.blogspot.com for an indepth Equity Analysis

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