Weak monsoon weighs on debt funds

Weak monsoon weighs on debt funds
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First Published: Tue, Sep 15 2009. 09 15 PM IST

Updated: Tue, Sep 15 2009. 09 15 PM IST
Indian government bond yields rose in August, owing to expectations of an increase in inflationary pressure and high auction cut-offs. The large government bond supply and lacklustre progress on the monsoon also weighed on investor sentiment. Headline inflation, as measured by the Wholesale Price Index, was -0.95% for the week ended 28 August, compared with -1.54% for the week ended 31 July. However, an increase in global commodity prices and a weak monsoon resulted in higher food prices and thereby led to expectations of higher inflationary pressure. The yield on the 10-year 6.9% government bond maturing in 2019 rose to 7.09% in August, from 6.78% in the previous month. The yields on corporate bonds also jumped, tracking the rise in gilt yields. Call rates remained stable and continued to trade in the 3.25-3.50% range on stable liquidity conditions, during the month.
In the foreign exchange market, the rupee depreciated against the dollar to 48.65 as on 28 August, from 47.93 on 31 July, with foreign exchange reserves amounting to $272 billion as of 21 August.
Also See The Monsoon Effect (Graphics)
METHODOLOGY
The Morningstar star rating methodology is based on a fund’s risk-adjusted return denoted as Morningstar risk-adjusted return (MRAR) within a given Morningstar category. Morningstar categorizes funds based on their average holdings statistics for the past three years. Morningstar uses expected utility theory as the basis for MRAR. The expected utility theory determines how much return an investor is willing to give up to reduce risk. Therefore, MRAR gives more importance to a fund’s downside deviation. To calculate MRAR, a fund’s monthly total return is calculated. The total return is then adjusted for risk-free rate to arrive at the Morningstar return. The Morningstar return is then adjusted for risk to calculate MRAR. Morningstar uses parameter gamma to describe investors’ sensitivity to risk. Morningstar fund analysts have concluded that gamma equal to two results in fund rankings that are consistent with the risk tolerances of typical retail investors. Morningstar risk is calculated as the difference between Morningstar return and MRAR. Morningstar rating is calculated every month for 3-, 5- and 10-year periods. The fund’s overall rating is calculated based on a weighted average of the available time period ratings. Within each rating period, the top 10% funds receive a five-star rating, the next 22.5% earn a four-star rating, the next 35% get three stars, the next 22.5% receive two stars, and the last 10% get one star. Morningstar rates each share class of a fund separately, because each share class has different loads, fees and total return time periods available. The distribution of funds among the star ratings depends on the number of portfolios evaluated within the category, rather than the number of share classes available.
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First Published: Tue, Sep 15 2009. 09 15 PM IST