Debt fund investors should understand that the NAV of a debt fund can change in three primary ways:
(a) To reflect the interest income the bond in the folio receive, the NAV will increase a little each business day.
(b) Longer the duration of the bond in the portfolio, the more sensitive it will be to demand and supply changes.
(c) NAV can change when the credit rating of the fund changes.
What happened in the bond market last week was a change in demand and supply. Foreign Portfolio Investors started selling Indian bonds resulting in a sudden loss of demand. When demand goes down, bond prices go down, the NAV goes down.
Market demand and supply is measured with the Bond yield = interest income/ current price. When prices fall, the yield shoots up. Longer the duration of the bond, more will be the fall in price if demand falls, more will be the increase in yield, more will be the fall in NAV.
It does not matter if the bond is gilt or AAA-rated. A sudden mismatch of sellers and buyers (sellers > buyers) will lead to a fall in the NAV. The image above shows how the five-year gilt yield shot up in the last few days resulting in trailing one-week (one-month) negative debt fund returns. It would also affect hybrid funds to varying extents.
The corresponding picture for the ten-year gilt is shown below. A corresponding and proportional variation will be in seen in bonds of different duration and different credit rating.
Only funds holding short-term bonds like overnight funds, liquid funds, money market funds were largely spared. Notice how the fall in NAV increases as the average maturity increases.
(a) To reflect the interest income the bond in the folio receive, the NAV will increase a little each business day.
(b) Longer the duration of the bond in the portfolio, the more sensitive it will be to demand and supply changes.
(c) NAV can change when the credit rating of the fund changes.
What happened in the bond market last week was a change in demand and supply. Foreign Portfolio Investors started selling Indian bonds resulting in a sudden loss of demand. When demand goes down, bond prices go down, the NAV goes down.
Market demand and supply is measured with the Bond yield = interest income/ current price. When prices fall, the yield shoots up. Longer the duration of the bond, more will be the fall in price if demand falls, more will be the increase in yield, more will be the fall in NAV.
It does not matter if the bond is gilt or AAA-rated. A sudden mismatch of sellers and buyers (sellers > buyers) will lead to a fall in the NAV. The image above shows how the five-year gilt yield shot up in the last few days resulting in trailing one-week (one-month) negative debt fund returns. It would also affect hybrid funds to varying extents.
The corresponding picture for the ten-year gilt is shown below. A corresponding and proportional variation will be in seen in bonds of different duration and different credit rating.
Only funds holding short-term bonds like overnight funds, liquid funds, money market funds were largely spared. Notice how the fall in NAV increases as the average maturity increases.
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