From THE HINDU group of publications
Sunday, September 09, 2001


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Higher-risk income funds

Suresh Krishnamurthy

IF INTEREST rates stay on course, most mutual fund schemes could fetch a return of less than 10 per cent.

In some cases, the return could even be below 9 per cent. One of the reasons why the return is low is because mutual funds have restricted themselves to investing in government securities and AAA-rated corporate securities.

The weight of AAA-rated securities and government securities in such schemes as Alliance Income, Birla Income Plus, Prudential ICICI Income, Sundaram Bond Saver and LIC Bond Fund may be over 90 per cent.

Given the low liquidity in the debt market, most mutual funds are unwilling to expose themselves to high credit risk. In fact, some fund managers say it pays to be conservative in the debt market and aggressive in equity. However, the rate of return on mutual funds indicates that the balance struck between risk and return is now too much in favour of risk. Given this backdrop, investors may not complain if fund managers are willing to entertain a higher degree of credit risk.

While investors may be willing to accommodate higher credit risk, asset management companies shy away from diluting the characteristics of their income funds _ which is low-risk. As such, the only choice seems to be the launch of new income funds. These funds need not be junk bond funds. They can restrict themselves to investment grade securities, but not AAA-rated securities.

If liquidity in these funds poses a problem, either around 30 per cent of the portfolio can be invested in government securities. Or it can be a interval fund with the fund opening for repurchase and sale at specific periods. The first option will reduce returns, while the latter will reduce liquidity.

Mutual funds might suggest that Monthly Income Plans are designed to do just this _ seek higher returns. However, almost all MIPs have botched the job by investing a portion of their funds in equities. Investors would have preferred it if mutual funds had, instead, invested in higher risk, investment grade securities to maximise returns. The appetite for MIPs suggest that investors welcome such initiatives.

Section  : Mutual Funds
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