Debt fund managers who were betting hard on interest rates easing further, lost heavily after the credit policy was announced on 8 February. The impact was especially felt in the short-term debt funds category, if the maturity buckets of short-term and ultra-short-term funds are any indication. But this is also making these funds a tad riskier than they typically are.
The average maturity of securities is generally less than 1 year for ultra-short term funds and 1-3 years for short-term debt funds. However, as the table below shows, a good 38% of the ultra-short-term funds were operating with average maturity of greater than 1 year as of November 2016, compared with 12% overall in the past 5 years. Similarly, a huge 54% of the short-term funds were operating above 3-year average maturity, compared with 23% earlier. The fund managers’ wager is simple—lock-in investments at current levels with some way to go on the easing cycle, so as to deliver market-beating returns later.
