The Hindu : Debt funds to give lower returns

Online edition of India's National Newspaper
Tuesday, Dec 02, 2003

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Business

Debt funds to give lower returns

By Oommen A. Ninan

MUMBAI DEC. 1 . Though interest rates have now dropped to historic lows, any further downward movement cannot be anticipated at this point. A cross section of investment experts and fund mangers while speaking to The Hindu agreed to the fact that double-digit returns from debt funds, as investors had been used to, in the last two years, are now part of history.

In fact, an analysis of debt fund performance in the one month period ended November 21, paints a grimmer picture. The top five losers in the bond fund category have posted an average return of (-)12.42 per cent while the category on an average had posted returns of (-)10.36 per cent. The Gilt Fund category, on an average, has lost (-)15.74 per cent in the same period.

The downturn in bond fund performance can be traced to the volatility in the debt markets since the November 3 Mid-Term Review of Monetary and Credit Policy. The new Reserve Bank of India Governor, Y. V. Reddy acted contrary to market expectations and kept all the rates unchanged, while at the same time reiterating the stance towards soft interest rates. Subsequent comments by the RBI on possible upward revision in the cash reserve ratio (CRR), recent guidelines of Securities and Exchange Board of India on listing of bonds and the ceiling of unlisted bonds held by banks have heightened a situation of uncertainty in the debt market.

Earlier gilt (government securities) and debt funds have given a return of over 15 per cent annually. "This happened only because of the volatility in the debt market due to a continuous fall in interest rates in the last 18 months. Since the mutual funds buy and sell securities and the market moved one way which is northwards (prices were up), they made good returns. Now if there is an expectation that interest rates are either bottomed out or will remain stable, the return due to trading in securities may be capped. Consequently, the return distributed to the investors also will be capped,''' said Kapil Bagla, Senior Vice President, Centrum Finance. He also said there had been a shift from debt to equity funds in the last six months as the equity market had been rewarding.

Under this condition, what does an investor in a debt fund do? Fund managers feel that while one has to maintain his investment in income products such as bond funds or gilt funds, there is a need to diversity or to move up in the ladder in terms of risk-return trade off. Pure fixed income investors could opt to have an exposure to MIP schemes with slight equity exposure targeted to generate return higher than fixed income schemes, Balanced schemes having the flavour of higher equity and Pure Equity schemes. For debt funds they advise that speciality funds like Dynamic Bond Funds that are able to actively manage their maturity profiles, would be able to optimise their returns considerably in this kind of volatile market situation.

The top MIPs in terms of six monthly returns as on November 21are: Tata MIP (12.55 per cent), FT MIP (11.11 per cent) and DSPML Savings Plus (10.92 per cent).

In Balanced Funds the top performing funds were Magnum Balanced (54.51 per cent), Sun F&C Balanced (54.35 per cent) and Tata Balanced (51.53 per cent).

In Diversified Equity Funds the top three performers in the period have been Tata Equity Opportunities Fund (107.88 per cent), HSBC Equity (95.80 per cent) and Tata Pure Equity (92.82 per cent). Birla Advantage Fund, another equity diversified fund, gave a return of 95.30 per cent in the last one year, Birla Mid Cap Fund 87.12 per cent and Birla Balanced Fund 61.08 per cent.

A. Balasubramanian, Head, Fixed Income, Birla Sun Life Mutual Fund, said, "While investing one should look at those fund houses which have a large range of products across the risk-return spectrum and narrow down the choice to product categories based on his risk appetite. And while choosing the fund, one should look at the size of the fund, the performance track record and background of the promoters.''

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