The Hindu Business Line : MFs find little interest in debt schemes, turn to public provident fund

MUTUAL funds are beginning to feel the heat of high interest rates offered by the provident funds and some of the MFs were already facing negative accretions, especially the debt schemes.

Sources said that some of the funds debt schemes were already faced with reduced corpuses, which have dropped, by as much as 75 per cent during the last year. A lot of this flight of funds from MFs debt schemes had migrated to public provident funds (PPFs). At present, PFs offered an assured interest of 9.5 per cent for a 15-year period.

After taking into account tax benefits, provident funds still offered better returns than most of the debt schemes in the country. Income tax concessions are available on interest earnings from provident fund investments.

Mr P.G.R. Prasad, Managing Director of the SBI Mutual Fund, said, "With PFs offering high returns, there is little interest in debt funds." In fact, during the first four months of this financial year, funds have faced redemption to the extent of Rs 51,519 crore, according to the Association of the Mutual Funds of India data.

Yet, not all the flight has gone to PPFs. Investment into PFs is constrained by the ceiling of Rs 70,000 per annum. As a result, some of the migration was to equity funds or to high liquidity funds, where investments were only in money market instruments.

"Equity funds have had large accretions," according to Mr S. Naganath, President and Chief Investment Officer of DSP Merrill Lynch Fund Managers Ltd. But even here few of the money market funds are able to come anywhere close to the returns offered by the PPFs.

One reason was that the average yield on some of the money market instruments was only about six per cent. Even assuming that some of them preferred to ride the yield curve, bankers said the returns were still far from what the PFs offered.

Riding the yield curve pertains to fund managers taking advantage of the cyclical movements in yields through consistent buying and selling.

One of the major issues was that the PPFs have long-term securities in their portfolios with some State Government papers offering high coupons. Some of the high coupons in the PF portfolios include 11.43 per cent 2015 papers.

But fund managers said that the ability of the PPF to sustain such high returns was difficult since the incremental yield on investments, especially Government securities have steadily dropped.

Besides, some of the State Government papers, where the PFs have invested as part of their mandated investments, were in large over dues or were seeking premature redemptions without settling interest arrears.

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