* Debt market has seen a downward fall of $5.4b. 10 yr yield on US
treasury increased from 2.1% to 2.5% offering better inflation adjusted
returns hence the outflow.
* Fixed income instruments are affected by Inflation, Economic Growth, Current Account Deficit and Currency.
* The Inflation was down to 4.6% in May 2013, Growth was pegged at 5% and CAD too fell. Then the rupee fell and played spoilsport. A 1% fall in currency adds 20-25 bps to WPI Inflation. The rupee fall increases inflation, making it difficult for the central bank to cut rates.
* The Rs fall and FII outflow has seen increase in G-sec yield from 7.2% (June 2013) to 7.6% (Rs dep'n usually leads to increase in yields.) The rising yields hits the returns from duration funds. After remaining close of 8% in 2012, G-Sec yield started falling, creating rate-cut hopes, until the June 2013 rupee fall triggered in fall of bond prices. According to ICICI, investors with 6 month horizon should invest in products with modified duration of upto 6 months i.e. ultra short term funds. For invstmnts upto a yr, products with modified duration of upto 2 yrs (short term funds)
* However, in the scenario that the rates (yields) fall (Kotak - by 50 bps), then one may earn double digit returns from combination of short term and long term income funds (e.g Gilt funds). Indications that if RBI cuts interest rates then Gilt and Income funds are likely to outperform other debt funds.
Also See - http://www.thehindubusinessline.com/money-wise/mutual-funds/how-gilt-funds-lost-their-sheen/article4960368.ece
* Fixed income instruments are affected by Inflation, Economic Growth, Current Account Deficit and Currency.
* The Inflation was down to 4.6% in May 2013, Growth was pegged at 5% and CAD too fell. Then the rupee fell and played spoilsport. A 1% fall in currency adds 20-25 bps to WPI Inflation. The rupee fall increases inflation, making it difficult for the central bank to cut rates.
* The Rs fall and FII outflow has seen increase in G-sec yield from 7.2% (June 2013) to 7.6% (Rs dep'n usually leads to increase in yields.) The rising yields hits the returns from duration funds. After remaining close of 8% in 2012, G-Sec yield started falling, creating rate-cut hopes, until the June 2013 rupee fall triggered in fall of bond prices. According to ICICI, investors with 6 month horizon should invest in products with modified duration of upto 6 months i.e. ultra short term funds. For invstmnts upto a yr, products with modified duration of upto 2 yrs (short term funds)
* However, in the scenario that the rates (yields) fall (Kotak - by 50 bps), then one may earn double digit returns from combination of short term and long term income funds (e.g Gilt funds). Indications that if RBI cuts interest rates then Gilt and Income funds are likely to outperform other debt funds.
Also See - http://www.thehindubusinessline.com/money-wise/mutual-funds/how-gilt-funds-lost-their-sheen/article4960368.ece
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