The Hindu Business Line : Debt funds clawing their way back

While inveterate stock chasers are not really expected to head-butt their way out of equity funds, many market participants are now seen to be thinking seriously about allocating more to debt.

It is much too early to find out how this will finally impact their overall equity exposure, but an effort to look at their latest thinking may well be worthwhile.

Mutual fund circles already refer to what they see is the beginning of a firm trend: A slow re-balancing of portfolios, this time in favour of debt. The general willingness to consider more debt investments, they add, is a fall out of the decelerating stock market, something that investors may have to live with for some time to come. Besides, the expectation that debt funds will start doing better is rising.

Numbers, clearly, will tell a tale of their own. While we are not citing hard statistics here, a diligent researcher may well check out the latest data in order to confirm our point. However, for the record, let us remind you that debt funds were quite out of favour all these (three) years. The question is, when will returns from debt funds start improving, assuming they are actually poised to look up? While all of us are vocal about rising interest rates and the RBI's policy on rates, not everybody is willing to speculate as to exactly when debt funds will turn for the better. Later this year or in the early part of 2007, is what some quarters are predicting.

A look at the state of our debt funds may provide some insights. While the equity market was surging ahead, debt (over the last three years) was delivering a pretty uninspiring performance.

Tame performance

In reality, debt fund managers were turning out single-digit returns, a show that pales in comparison. If you are still interested, let us tell you that floating rate funds of the short-term variety provided the best deal in the last three years: 5.26 per cent, according to Value Research. And just to emphasise a point, diversified equity funds gave an average 48 per cent over the same period.

Now, if you whittle down the time frame to one year, these short-term floaters provided an average 5.82 per cent. This list is topped by Canbank MF's floating rate scheme, which gave 6.51 per cent during this period. It takes no Einstein's brain to say that most of the others have run quite close to each other.

How are MFs and distributors looking at the possibility of debt funds shaping up? They know that distribution strategies must be fine-tuned a bit to suit the impending change. Some of the players sound pretty convinced that debt will attract more money than before. At the same time, however, they are certainly not saying that investors are losing interest in equity funds completely.

In fact, some distributors point to the fact that SIPs (into equity funds) are now being worked out in greater numbers. These include, they also claim, SIPs with ticket sizes that are larger than what was generally seen before.

Feedback may be sent to nilanjan@thehindu.co.in

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