Actively-managed debt funds with the flexibility to go long on duration made a strong comeback on the returns chart in 2023 on the back of softening bond yields. Average one-year returns of floater, long duration, gilt and dynamic bond funds, which stood anywhere between 2.3-4.5 per cent at the end of 2022, now stand at over 7.2 per cent with some of the schemes even delivering over 8.5 per cent, shows data from Value Research.
Debt fund returns are inversely related to the yields of the underlying investments, which means a decline in yields is a positive for funds. Also, the higher the duration of the debt papers in the portfolio, the larger is the gain.
Ten-year government bond yields were relatively volatile in 2023, moving in the range of 6.96 – 7.43 per cent. At present, it stands at 7.19 per cent, shows data from Bloomberg.
“The duration of a portfolio works as a multiplier. Hence, fund managers who raised their portfolio duration at the right time benefited from the decline in yields,” said Joydeep Sen, author and corporate trainer (financial markets).
Softening yields and active duration calls were not the only factors behind the improved performance of gilt funds, especially schemes that have delivered above-par performance.
“In 2023, investing in floating rate bonds helped the fund perform well. This approach worked well for us, because in this rate cycle, where RBI moved from 4 per cent to 6.5 per cent, these bonds delivered good returns to investors and emerged as a major differentiator for us,” said Anuj Tagra, who manages a gilt fund at ICICI Prudential Mutual Fund. The scheme has delivered 8.6 per cent in the one-year period.
At the end of November, the scheme had close to 40 per cent exposure in floating rate government bonds. Kotak gilt fund, which has also delivered over 8 per cent return, had 28 per cent of its portfolio invested in these papers as of November 30, shows Value Research data.
Floating rate bonds do not have a fixed interest rate like other regular bonds. The rate is linked to a benchmark and keeps changing depending on the trend in the debt market.
Floater funds, which predominantly invest in floating rate bonds, have also shown a sharp improvement in performance. On average, these schemes have delivered 7.7 per cent in the one-year period.
First Published: Dec 21 2023 | 6:36 PM IST