The Hindu Business Line : `Chief concerns stem from inflationary pressures'

If you are a debt fund investor with a longer term vision, you really have no major cause for worry, argues Mr Sandeep Bagla, Head - Fixed Income, Principal MF. There remains nevertheless that peculiar element which any debt fund manager worth his salt must contend with: inflationary pressure and its ramifications.

While investors should learn to live with inflation, they should not allow themselves to stray from their chosen asset allocation policy for far too long, he adds.

Excerpts:

Debt, as some sections feel, is set to stage a comeback. How do you think this will pan out?

Debt funds have performed well in the recent past, delivering solid double digit returns in annualised terms on the back of softening yields and easy liquidity. In September, yields may rise a bit providing investors an opportunity to invest in short term income plans.

Here, we reiterate a point that is acknowledged by all and sundry: debt funds combine steady returns, tax efficiency and liquidity. Additionally, these provide stability to an investor's portfolio. This reasoning should prompt investors to actually put a large part of their savings in debt funds on a regular basis.

In fact, there is a case for stepping up allocation to such funds, as central bankers around the globe seem to have increased regulatory interest rate levels to a neutral position and might wait a while before taking any other decisive step.

What can investors expect from medium- and long-term debt funds in the near future?

If you invest for a medium-to-long term, you need not worry much about anything. The returns to the investors will come from interest income generated by the portfolios, compounded by the incidence of capital gains or losses.

Let me add at this juncture that income funds have performed quite well, generating competitive returns over the last couple of years when interest rates have been headed up unidirectionally.

In a scenario marked by stable interest rate, debt funds may well be expected to perform even better.

What are debt fund managers' major concerns at the moment?

The chief concerns stem from inflationary pressures, arising primarily out of commodities and crude oil prices. Also, when economies are growing at a rapid pace, there is upward pressure on interest rates - thereby depressing bond returns. Investors too should be aware of this factor.

We feel that if crude oil prices come down, performance delivered by bond funds may start getting even better.

With the equity market moving up, investors' interesting is perhaps shifting again to stocks...

Despite what may have lately happened on the equities front, we at Principal are of the view that no investor should permit himself to deviate from his asset allocation for too long.

I am referring to the most appropriate strategy that an individual entity should follow, on a case-to-case basis. It is important that long-term surpluses be invested in a combination of equities and long-term income funds.

At the same time, if you have medium term resources at your disposal, you could consider investing in a combination of debt products.

And the money required for transaction needs may be invested in liquid funds.

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Clarification

Wanton as youthful goats, wild as young bulls

`Chief concerns stem from inflationary pressures'

Undertone is positive... for now

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