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Veena Venugopal

Mumbai , March 26

ASSET management companies are hoping that the current slump in the equity markets will help provide some respite to dying debt funds.

The poor run that debt funds have had in the last few months have put them behind savings schemes and even bank deposits in terms of returns offered.

Investors have been moving out of this fund category in the wake of more lucrative avenues for investment, within the same risk range.

Banks are also understood to be offering high rates of interest on deposits especially to large investors ahead of closing their books on March 31. This, added to the tepid debt market, has been sounding the death-knell of debt funds.

However, now with the equity markets turning choppy, asset management companies are looking to lure some investors back into debt funds.

"Even after deducting the relevant tax from investments in bank deposits or savings schemes, clients have been getting much better returns from these investments when compared to debt funds. Therefore, instead of parking money in various debt funds, we are now advising our clients to explore these areas," said Mr Gaurav Mashruwala, Director, ACE, a financial planning company.

Distributors are of the opinion that inflows into debt funds have reduced to a trickle now. With floating rate products posting 12-month returns of 4.75 per cent and medium-term debt funds returning 1.25 per cent on an average, investors have understandably been staying away.

"Returns are always relative. If the equity markets remain choppy for some time, investors will see value in debt funds again. Debt fund inflows have been dropping as money moved to equity funds during the bull market. That trend might get reversed now," said Mr Naval Bir Kumar, Managing Director, Standard Chartered Mutual Fund.

Mr Kumar heads the only all-debt fund house in the country and the Assets Under Management (AUM) of the fund could be an indicator of the fortunes of debt funds.

AUMs of Standard Chartered Mutual Fund have slipped from the Rs 9,000-crore-plus levels in October 2004 to Rs 8,100 crore in January 2005. This level has crept up to Rs 8,650 crore in February.

Expectations of higher inflows now are also because high net worth individuals who have booked profits at the peak of the equity run are redeploying these in safer debt funds.

However, the fortunes of debt funds are hinged not only on a continued slump in equity markets but also on the direction of interest rates movement. With the US Fed announcing a hardening of interest rates, Indian debt markets will also possibly have to face further pressure on returns.

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