The Hindu Business Line : FMPs have become powerful category in recent days

Is there life beyond shorter term debt funds? That question has been doing the rounds for quite a while now and mutual fund circles have been trying to answer it in vain.

Now, if you have been following debt funds, you will know that the action is very much restricted to shorter term products, with most investors barely giving a glance at such things as long term income options. Not without reason, you will argue, underlining the challenges that those seemingly unpopular funds currently face.

While it may be a little premature to discuss the possibility of a change in status, some sections have started to at least talk about it a little more openly. Certain categories of investors, it is felt, are readying to step ahead of the humdrum world of liquid funds and fixed maturity plans.

FMPs particularly have become a powerful category in recent days.

Whether this is really happening or not will be clear soon. However, let us for the time being focus on the debt market – and the way it may throw up a surprise or two in the days ahead.

Volatility

But, first, volatility. Yes, you guessed it correctly, call rates have not been quite steady in recent times. And the rupee is not resting easy either. At any rate, it has become considerably stronger, boosted as it has been by steady forex inflows, remittances by expatriates and several other reasons. Most fund managers we have been talking to maintain that the fixed income market will continue to have a cautious undertone for the rest of the year.

Equity exposure

Given such hopes, how should the average debt fund investor behave? Well, sticking to his asset allocation may be a good thing to do. However, some sections may well advocate a slight tilt towards equity.

Assuming that the investor in question does actually think of an added equity exposure, one may strongly urge him to use such alternatives as MIPs (monthly income plans). The point to note here is that an MIP is typically a hybrid product, with very limited exposure to equity. The latter in most cases accounts for 10-20 per cent of the fund’s assets.

Now, what are the pros and cons of investing in MIPs? That is an easy question, given that these funds allow you to essentially stay anchored in debt even as they let the equity component enhance your returns. Nevertheless, if the overall equity market is doing very well, there is no point in sticking just to such relatively dull options as MIPs.

Here, we would like to underscore our belief that investors have generally ignored MIPs (even earlier, when the overall sentiment was a bit less ebullient).

While quite a few products are available, even the best-performing fund in the category is not quite large. Undoubtedly, the average monthly income product is constrained by size. And the asset management industry needs to ask itself why this is so.

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