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Bond funds risk-free, not anymore

Ashok Jainani

MUMBAI, Aug. 10

SO, you thought investments in equities were a risky proposition and those in debt instruments a safe haven. Think again. Tumbling of net asset values (NAV) of various fixed-income bond funds, following the recent bank rate hike, tell a different story.

It shows that investments in bond funds portfolio are as dynamic as those in equities which go up and down depending on the market conditions. The only solace is that investments in fixed-income funds restart gaining steadily after adjustment in securiti es prices necessitated by changes in the central bank rate.

The recent turmoil in the foreign exchange markets forcing the Reserve Bank of India to hike the bank rate has had its impact on the NAVs of many bond funds managed by various mutual funds.

In some cases, the funds have got a hit as big as to wipe out all the incomes earned during the past two months. Some of the funds had seen their NAVs drop by as much as 20 paise per unit or 1.4 per cent in absolute terms after the securities prices fell following the bank rate hike on July 21.

Funds which had large exposure in long-dated securities had got a bigger hit as prices of paper with long maturities registered a greater fall in comparison to securities of shorter maturities.

The Unit Trust of India Executive Director, Mr. S.K. Basu, told Business Line that the debt fund manager has to actively manage the portfolio as debt markets are turning out to be as dynamic as equities. ``Investors have to take market risks in their str ide as the fund manager can only manage the credit risk,'' Mr. Basu said.

The LIC Mutual Fund Chief Executive, Mr. R.G. Sharma, said that risk-averse investors would still prefer bond funds as they provide steady returns over long term. ``The short-term declines are negated over a longer period of time and still give positive returns,'' Mr. Sharma said.