Exodus from debt funds

Aabhas Pandya

The volatility in debt markets has finally taken a toll on open-end debt funds. Investors have pulled out an estimated Rs 7.75 billion from 12 debt funds in August 2000 (for which the corpus were available). Key players say while some investors have withdrawn in panic, others have shifted their investments to short-term debt funds to prevent erosion in investments.

The redemption pressure has come at a time when the battered debt markets were beginning to look up. The i-BEX Total Return Index, after falling for three consecutive months, had marginally inched up in August by 0.11 per cent.

The worst hit is Kothari Pioneer Income Builder Account. The fund has seen its assets under management go down by over 33 per cent from Rs 5.36 billion on July 31, 2000 to Rs 3.57 billion on August 31. While most debt funds have witnessed redemption, a couple of funds have seen inflows during August. For instance, the corpus of Zurich India High Interest has gone up marginally from Rs 3.28 billion to Rs 3.38 billion.

"We have seen a lateral shift in investments from Birla Income Plus to Birla Cash Plus in the last one month. We have been recommending investors to put money in the cash fund to avoid the volatility in debt markets," says an official with Birla Sun Life Asset Management Company. The size of Birla Income Plus has gone down from Rs 18.06 billion on July 31 to Rs 16.97 billion on August 31 while assets under Birla Cash Plus have risen from Rs 2.46 billion to Rs 3.17 billion during the same period.

In the case of Alliance Liquid Income, however, there has been no lateral shift but investments have been redeemed. The fund has shrunk by Rs 0.57 billion to Rs 8.50 billion in August. "While we have seen fresh investments in our short-term debt fund, there has been no shift of investments from Alliance Liquid to Alliance Cash Manager," said an official with the AMC.

With debt markets in a tailspin and funds only holding around 15-18 per cent in cash, most funds are likely to have sold their holdings at a loss under redemption pressure. Those funds, with a high exposure to government securities, would have been relatively better off since it is easy to liquidate these holdings vis-à-vis corporate bonds.

The redemption pressure also brings to the fore the relationship between size and stability of a debt fund. For instance, even as Prudential ICICI Income Fund has seen its size go down by Rs 1.16 billion, it actually translates into a mere 6 per cent of its size of Rs 20.12 billion on July 31, 2000. The fund would have met this redemption pressure with ease since it had around 19 per cent (Rs 3.80 billion) in cash as on July 31, 2000. However, a similar redemption volume could destabilise a fund with a smaller asset base.

Fund	Net Assets	(Rs crore)
	July 31	August 31
Alliance Liquid Income	907.00	849.70
Birla Income Plus	1806.34	1697.00
DSPML Bond	900.00	762.08
Dundee Bond Corporate	13.28	5.26
Dundee Bond PSU	7.17	7.33
ING Income Portfolio	221.00	210.93
Jardine Fleming India Bond	224.61	197.99
K Bond Deposit	17.40	18.83
K Bond Wholesale	170.22	111.75
Kothari Pioneer Income Builder	536.52	357.08
Prudential ICICI Income Plan	1960.42	1843.94
Sundaram Bond Saver	328.39	318.18
Templeton India Income	1027.66	957.74
Zurich India High Interest	328.87	338.80

Source: Value Research

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