The Hindu Business Line : Pressure on debt funds may continue

Selecting the right options will be, as always, the biggest challenge. Distributors, especially the ones who practise financial planning, can render a major service in this situation.

IS it time to ease out of our investments in debt funds? That's the question that lots of investors are asking themselves right now. And not without reason, considering the modest performance turned in by income funds in recent times and what they are expected to deliver in the coming days.

This obvious pessimism stems from the belief that returns from these funds will continue to remain under severe pressure for some more time.

The tale of woes is being told in many ways. Some fund houses are being quite blunt about it, explaining that expectations from long-term income and gilt funds are relatively lower this time, in line with yields presently prevailing in the market. Others are a shade more positive, referring to their efforts at providing what most of them call "superior risk-adjusted returns".

It is not that there are no developments on the debt front. On the contrary, there have been a plenty of issues to talk about, ones that have cropped up in recent days.

For details, let's tune in to what one of the country's biggest fund houses, HDFC Mutual Fund, has to state. It points out that sentiment in the g-sec market has remained tame due to relatively high inflation numbers.

There was some respite when Fitch upgraded India's long-term foreign currency rating by a notch and Moody's followed suit. On the other hand, concerns over the fiscal situation were voiced again. Given these conditions, HDFC MF continues to maintain its expectation of "stable to lower interest rates" and "position itself in instruments and maturity buckets that provide high relative value in an attempt to deliver superior risk adjusted returns".

Other players feel that the market will be range-bound to an extent, while the liquidity situation will remain comfortable. But expectation of an improvement in credit (as well as investment-led demand) may stop a major decline in interest rates. Debt fund managers are only too aware of the realities, and statements made by some of them reflect this awareness. These statements are inherently the same: You should not expect extraordinary feats by way of performance.

An investor, in a situation like this, has to think a lot in order to fine-tune his or her asset allocation strategy. Do I still remain invested in debt in the same way as before? Do I need to shift a part of my debt fund holdings to alternative investments like MIPs? These are questions that are being asked very frequently at this juncture. There are obviously no precise answers. It may be generally stated that one needs to constantly look for new opportunities to improve returns. For some investors, a limited exposure to monthly income schemes - which have some provision for equity — may be the finest solution. For others, a shift to liquid/short term funds may be the right thing to do.

Selecting the right options will be, as always, the biggest challenge. Distributors, especially the ones who practise financial planning, can render a major service in this situation.

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