Average Maturity – The playing factor - Amar Ranu 1 Post sub-prime crisis, liquidity was, as if, sucked out of the financial system all over the world. All the bourses which were trading at their historic high had already melted to its historic low. India, too, seemed coupled with the ongoing crisis and had left the investors in jittery looking for cover. Crude oils which started the year 2008 at $95.78 have already surpassed $145, thus, widening the fiscal deficits in India’s capital book. Inflation was moderate in the range of 4 to 6 per cent till Feb 2008. YTM (Yield-to- Maturity) of government securities and debt instruments were quoting in the comfortable zone. With the widening of fissures in overall equity market and the continuous rise of crude oils pressed the panic button on the inflation front to its double digit 11.98 per cent and the bond market, thus, tumbled. This forced the central bank RBI to take several monetary and fiscal measures, and ultimately, the liquidity was sucked out of the system with a series of hikes in CRR and Repo rate. In mutual fund industry, where debt plays a significant role in the holdings among the corporate and retail investors in various categories like Income Fund, Liquid Fund (including its sibling Liquid Plus), and MIP etc started perceiving its NAVs decline due to differences seen in the yields over a horizon of different maturities. The average maturity of MIPs’ debt component which used to be 3.2 years in the year’s start nosedived to 1.64 years in June 2008. The fund managers, once, swayed over the longer maturity of the debt instruments were bewildered and could not encash the arbitrage available in the market. To a large extent the fund managers reduced the maturity of the instruments and the proceeds out of redemptions and new collections were actively invested in taking new calls for a comparatively shorter duration. In case of income funds too, the average maturity of the schemes plunged to 2.09 years in April 2008 to 1.27 years in June 2008 exhibiting the skyrocketing of interest rates, thus, increasing the overall YTM of different debt securities. 1 An independent columnist and writes for different websites and magazines on financial domain. He can be reached at [email protected].

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Page 1: Average Maturity, the playing factor for Mutual Fund

Average Maturity – The playing factor - Amar Ranu1

Post sub-prime crisis, liquidity was, as if, sucked out of the financial system all over the world. All the bourses which were trading at their historic high had already melted to its historic low. India, too, seemed coupled with the ongoing crisis and had left the investors in jittery looking for cover. Crude oils which started the year 2008 at $95.78 have already surpassed $145, thus, widening the fiscal deficits in India’s capital book. Inflation was moderate in the range of 4 to 6 per cent till Feb 2008. YTM (Yield-to-Maturity) of government securities and debt instruments were quoting in the comfortable zone. With the widening of fissures in overall equity market and the continuous rise of crude oils pressed the panic button on the inflation front to its double digit 11.98 per cent and the bond market, thus, tumbled. This forced the central bank RBI to take several monetary and fiscal measures, and ultimately, the liquidity was sucked out of the system with a series of hikes in CRR and Repo rate. In mutual fund industry, where debt plays a significant role in the holdings among the corporate and retail investors in various categories like Income Fund, Liquid Fund (including its sibling Liquid Plus), and MIP etc started perceiving its NAVs decline due to differences seen in the yields over a horizon of different maturities. The average maturity of MIPs’ debt component which used to be 3.2 years in the year’s start nosedived to 1.64 years in June 2008. The fund managers, once, swayed over the longer maturity of the debt instruments were bewildered and could not encash the arbitrage available in the market. To a large extent the fund managers reduced the maturity of the instruments and the proceeds out of redemptions and new collections were actively invested in taking new calls for a comparatively shorter duration. In case of income funds too, the average maturity of the schemes plunged to 2.09 years in April 2008 to 1.27 years in June 2008 exhibiting the skyrocketing of interest rates, thus, increasing the overall YTM of different debt securities.

1 An independent columnist and writes for different websites and magazines on financial domain. He can be reached at [email protected].