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Time to enter debt funds?

Aabhas Pandya

Even as the equity markets continue to lack direction, the launch of India Millennium Deposits (IMD) issue has brought a fair degree of stability to the debt markets. Despite shocks emanating from the Middle East and uncertainty on oil prices, the sentiment has turned positive as the IMD issue is expected to mobilise anywhere between $2-4 billion and shore up the forex reserves. Besides, it will further buoy liquidity in the system. And, although a skittish rupee continues to cause concern, the debt markets are not religiously tracking the currency.

"The debt markets look fairly stable for the next few months and we are bullish, thanks to the IMD issue. However, a sharp upsurge in debt prices is not expected since unlike last year, debt funds are not flush with fresh investments. Nonetheless, it's a good time to enter debt funds,'' says a debt fund manager with a Bombay-based mutual fund. Adds Rajiv Anand, fund manager, ANZ AMC, "Investors continue to remain focused on cash funds. However, we have been advising investors a shift into income funds. The bond markets seem to be coming out of a long bear grip and we could see handsome mark to market gains in income funds."

The short-term bouts of selling notwithstanding, trend in debt markets has been largely bullish with the i-BEX gaining nearly 1 per cent in the last month ended October 31. Following the trend, medium-term debt and government securities funds (or gilt funds) have gained an average 0.96 per cent and 1.01 per cent, respectively for the one-month ended October 31, 2000. The returns are surely better than the average one-month return of 0.76 per cent and 0.82 per cent for the two categories respectively, for the period ended September 30, 2000.

Add to it, bond funds are now generating higher returns than liquid funds after a gap of nearly three months, which means that the yield curve has straightened out. Bond funds, which had considerably reduced the average maturity, are now beginning to deploy assets in medium-to-long term. The activity in medium term bonds also increased with trades for five and three year AAA papers.

"I have increased the average duration of the gilt fund to about three years. I have a positive view on the interest rates since the US economy seems to be slowing down indicating no further possibility of interest rate hikes. Add to it, the tax collections are very positive largely because the tax net has been widened with the six-in-one scheme and we should not see any excess government borrowing during the year,'' says Sandesh Kirkire, fund manager, Kotak Mutual Fund.

Adds Nilesh Shah, chief investment officer, Templeton Mutual Fund, "Yes, we have increased the maturity profile. Although oil is a joker in pack, but removing that uncertainty, everything is in place for a small rally in short term at the longer end of the curve."

However, even as debt fund managers are bullish, are investors willing to bite the bait and invest in bond funds? "We have seen some select investments move from liquid fund to our bond fund. However, most investors are still apprehensive after the losses suffered earlier this year,'' says the Delhi-head of a mutual fund. Surely, most investors do not want to tread on the bond route, fearing another bout of volatility beneath the calm surface.

Source: Value Research

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