The Hindu Business Line : Debt funds sitting on cash pile

CASH is king in the world of debt funds, with fund managers deciding to stay close to this most liquid of all assets, waiting to deploy their large piles when market conditions turn better.

Cash or its near equivalent contributes significantly to the portfolios of a large number of debt funds, a quick study of the latest month-end numbers indicates. Depending on the views of the fund managers concerned, cash in many cases accounts for 15 per cent-20 per cent of the portfolios of medium-term debt schemes, with the figure reaching as high as 30 per cent-40 per cent in some cases.

Mutual fund circles attribute the situation to a tough market, with fund managers underlining the need for a cautious approach. Bearish trends - higher inflation numbers, for instance - are being particularly referred to in this context.

Principal MF, for its part, is talking about the inflationary situation, proposals on fiscal adjustments and moves to reduce duration by many active investors. In recent days, Principal has maintained a soft stance with a view to align its portfolios in tune with market conditions.

A look at the data released by Value Research points towards widespread preference for cash and other liquid investments.

Chola Triple Ace has run up a 33 per cent exposure to cash as on August 31, 2004; government securities account for a mere 10 per cent of it. Others that have shifted considerably to cash include LIC MF Children's Fund (35 per cent), Reliance Medium Term (30 per cent), UTI CCP Bond (36 per cent) and JM Income (33 per cent).

Mr Sandesh Kirkire, head of debt funds at Kotak Mahindra MF, sees this as a temporary phenomenon, one that will change once the investing climate turns more conducive. "Debt funds are doing this to protect investors' interests. Given enough time, circumstances may well turn different," he said.

Medium term income products have mostly disappointed investors in recent months. Three-month returns have been negative in most cases, the average score here being minus 1.05 per cent (as on August 31).

The better performers in this category include BoB Income (which had 19 per cent of its assets in cash and 80 per cent or so in corporate papers) and Libra Bond (with a huge 79 per cent in cash).

If leading debt funds are loaded with cash, some MIPs are not far behind either, sources point out. Birla MIP II Savings 5, for example, is 27 per cent invested in such liquid assets, while SBI Magnum Income Plus Investment has 58 per cent in them. A section of the hybrid schemes has shunned gilts too.