Bond market mutual funds returns and risk management

Abstract

Executive Summary This study begins with a brief look at the history of bond funds in India, tracking the origins of the Mutual Fund Industry and its rapid growth since liberalization. A sample of 162 gilt funds offered by 29 AMCs operating in India is then taken. The NAVs and dividends of these funds are obtained and used to calculate Dividend adjusted NAVs. The monthly returns for these funds are computed and the funds are compared based on these returns. The funds which are consistently among the top performers are identified. The performance of each fund is then compared with that of the appropriate index (the ICICI LIBEX) and periods in which each fund outperforms the index are identified. The out-performance periods of all the funds are compared and it is concluded that the out-performance periods of several of the funds coincide. An attempt is then made to explain these abnormal returns by examining portfolio changes. The portfolio of each fund is represented by the percentage of total assets kept as cash and other money market instruments (cash position) and average maturity. A further sample of 41 gilt funds is chosen and changes in the cash composition and average maturity of these funds are traced. These changes are then compared with actual changes in yields in gilt securities and the success of the funds in predicting these changes is estimated. A single fund, which had earlier been identified as one of the top performers is then chosen from the sample and its periods of out-performance are explained by portfolio changes. The study concludes by looking at future trends among bond funds in India, and looks at the possible emergence of indexed bond funds such as the Asian Bond Funds.