Debt funds draw in the affluent

    Aarati Krishnan
    BL Research Bureau
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Average return was 9.5% over the last one year, against 5% by equity funds

Vexed with the vacillating stock market, affluent retail investors are looking to debt mutual funds for lucrative returns.

Between April and July this year, investors poured nearly Rs 45,000 crore into debt funds. This was a 65 per cent jump over the same period last year.

“Retail money tends to move into any asset class when returns have been good,” explains Naval Bir Kumar, Executive Vice-Chairman, IDFC Mutual Fund. “This is not new. In 2000, if you remember, debt funds used to provide very good returns and there was a lot of retail interest in them.”

Debt mutual funds have earned an average return of 9.4-9.5 per cent over the last year, while equity funds scraped together just 5 per cent.

For investors in the higher tax brackets, returns from debt funds suffer lower tax due to indexation benefits and dividend distribution tax. This makes them attractive relative to bank deposits. Any-time liquidity is another plus.

The top debt funds even recorded double-digit returns from investing in short-term corporate bonds, wholesale deposits and commercial paper at high interest rates.

“Short-term and dynamic bond funds are the flavour of the season”, says A. Balasubramanian, CEO, Birla Sun Life Mutual Fund. Birla’s Dynamic Bond Fund, which sports a 10 per cent return for one year, has seen a sevenfold jump in assets.

Its size has swelled from Rs 1,700 crore to a whopping Rs 12,000 crore in just one year. Dynamic bond funds are a class of funds which can shift quickly across different types of debt, based on where opportunities lie.

High net worth investors, putting in Rs 5 lakh or more, were the first on the bandwagon. AMFI data show that they accounted for as much as 36 per cent of the assets held by debt funds in March 2012, up from 20 per cent two years ago. Smaller individual investors have followed suit.

With these inflows, debt funds, which traditionally managed treasury money for companies, today manage substantial retail money.

Individual investors accounted for nearly 44 per cent of the assets managed by debt funds in March 2012, compared with 26 per cent two years ago.

Wooing retail

Fund-houses, on their part, have been doing their best to push this trend along. Birla Sun Life Mutual Fund, for instance, has recently unveiled the Recurring Savings Plan, which allows one to invest in select debt funds from the Birla stable through monthly instalments, mimicking the popular systematic investment plans for equity funds.

The fund house also imposed stiff exit loads for early withdrawals on two of its debt funds, in order to discourage large investors from using these funds as a temporary parking ground.

Fund houses also want to make it attractive for retail investors to shift idle surpluses out of their savings bank accounts into liquid or money market funds.

A few, such as IDFC Mutual Fund, have introduced SMS-based transaction facilities that allow investors to quickly switch money between their bank account and a liquid fund.

(This article was published on August 19, 2012)
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