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`High-yielding debt funds can beat bank deposits hollow'

R.Y. Narayanan

Since the return from debt funds would be three or four per cent more than bank fixed deposits, it has made the people to turn to the debt funds, says Mr Naval Bir Kumar.

Coimbatore , Aug 10

THE future of the mutual fund industry in the country would come from the retail investors and the growth in the funds mobilisation by the private sector mutual funds would outpace that of bank deposits.

It was a tough job earlier to break the mindset of the retail investors from fixed deposits but with bank FD interest rates plummeting, higher yield from debt funds looked attractive to the retail investors, according to Mr Naval Bir Kumar, Managing Director, Standard Chartered Mutual Fund (SCMF).

He said a string of advantages of investing in debt funds including high liquidity and quick redemption, lower incidence of taxation and the safety of the principal invested because the funds such as SCMF invested only in AA+ or AAA-rated papers all worked in favour of investing in the debt funds.

Since the return from debt funds would be three or four per cent more than bank fixed deposits, it has made the people to turn to the debt funds.

He said when the interest rates were falling, the returns from the debt funds were very high because the funds were making capital gains on their bonds portfolio. But now with the decline in interest rates slowing down, the return from the debt funds also would slow down compared to historical returns. But the ironical part was that more retail investors were coming to debt funds because the returns from comparative products to which they were used to - bank FDs - have fallen even more. The people were looking at debt funds since they at least outperformed the inflation rate on a post-tax basis.

The SCMF MD, who was speaking at a news conference in Coimbatore, answering a question conceded that with the capital market picking up there would be definitely some movement from debt to equity and already it was happening. But he said that the shift from bank deposits to debt funds would be `bigger' than the move from debt to equity.

He said four years back the size of the private sector MFs was around one per cent of the bank deposit market. Today, it was close to five per cent. The bank deposit market has been clocking an annual growth of 13-14 per cent and it was a huge market. But the MF industry was growing `more rapidly' than the bank deposits market.

Mr Kumar estimated that as a percentage of bank deposits in a period of five years, the MF industry would grow around 15-18 per cent annually, which meant that funds such as SCMF which has a corpus of Rs 7,000 crore-Rs. 7,500 crore now would grow to a size of Rs 25,000 crore-Rs 30,000 crore fund.

Asked whether his fund, which has so far grown organically, was eyeing any acquisition, he said `none, as of now that I can speak of'. He said the reason for SCMF restricting its activities to the debt fund market was `we believe that's where our core competency lies'.

Asked whether SCMF was planning to enter the pension fund market once the sector was opened up, he said pension market was a large business opportunity and `if any meaningful market opens up for us we would definitely be willing to look at it' provided the rules were in line with its investment philosophy.

He said South India accounted for about 20-22 per cent of the total number of investors in the schemes of SCMF and the total share of the southern states in the corpus of the fund also was around that level.

Answering a question as to whether SCMF was not perceived to be an aggressive fund in taking risks to provide higher returns, Mr Kumar said `no, I would beg to differ'. He said SCMF was one of the `most conservative debt fund managers' in the sense that it was SCMF that started active debt fund management.

He said as on December 2002, the fund had its branch offices in eight cities in the country and by the end of this year, he wanted this to go up to eighteen cites.

On the reasons for naming the schemes after Grindlays (Bank) though the fund was known as Standard Chartered MF (the Grindlays bank has been taken over by Standard Chartered Bank) he said it enjoyed `high recall and customer loyalty across India'. The Grindlays brand has been visible in India for 130-140 years and to get the benefit of that, the Grindlays brand name was being used.

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