The Hindu Business Line : `Debt funds will stage a come-back '

MR NILESH Shah, Chief Investment Officer, Prudential ICICI Mutual Fund, hopes that debt funds will one-day stage a comeback. Of course, this former functionary of Franklin Templeton can't say for sure when such a comeback will actually materialise.

But he is pretty clear as to the factors that will affect returns generated by debt funds. Oil prices and the credit available in the domestic market, for instance, will be a key issue for fund managers in times to come.

Mr Shah also observes, perhaps not without a touch of philosophy, funds must dwell among ups and downs.

Excerpts from an interview

What are the main factors that will influence debt returns in the days ahead?

Returns from debt funds will be influenced by overall interest rate scenario, which in turn is dependent on how global economy fares in next year.

Some of the factors that should be watched out for would be oil price movements, domestic credit demand, FII flows to debt and equity markets and the government's ability to manage fiscal deficit within prescribed levels.

With the recent cancellation of auction, debt prices have moved up significantly in the past few days. This, therefore, may not be the best time to enter.

However, if investors enter at 10-year yield of seven per cent or more, they can expect to generate positive returns. Such returns may be in the range of medium to higher single digits.

Is there a case for mixing more equity with debt? Should investors allocate more to equities as a matter of principle?

The extent to which an investor should allocate to debt as well as equity will depend on his or her risk appetite and return needs. This in turn will depend on which stage of lifecycle such an investor is going through.

Hence, it will be incorrect to suggest that there should be a higher equity allocation for all categories of investors. There is no one-size-fits-all norm to be considered here.

I must add that equity has its very special place among all the asset classes. It has also been proved time and again that equities in the long run always outperform other asset classes.

What has been your strategy when it comes to managing downside risks?

As a general principle, we manage downside risks by actively managing maturity/duration of the funds as well as follow effective asset allocation strategy in order to achieve portfolio diversification across different asset classes.

As a fund house, we will continue to follow this strategy in the coming days.

This time, a personal issue. How do you cope in a situation where debt funds seem to be nobody's children?

Well, this business of ours is cyclical. As the popular saying goes, change is the only thing that is constant. After all, debt fund managers had six years of bull run. It all had to come to an end one day.

We have to live with what are commonly known as the ups and downs of the markets. At the end of the day we have to do our job with sincerity.

Asset allocation remains the key to successful investment. I am sure one day - and that may be in the not-too-distant future itself - debt will again come back in favour.

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