1. 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.
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