Debt products help in spreading risk over assets other than equity

Nilanjan Dey

Who would you trust more - a skilled bond trader who sticks to his conservative stance or a sharp equity specialist who sells earnings growth stories?

Never perhaps in the past have Indian investors been more desperate to answer that question than now. Or so convey mutual fund circles, aware as they are of the dilemma many of their clients are facing right at this moment.

Now, before you attempt an answer, consider this: The equity market has slipped from its recent high, corporate earnings are seen to be under greater pressure and at least some very large overseas investors have lately considered India as an over-valued destination.

Consider, also, some of the realities faced by debt market investors - the central bank's marksmanship, flighty oil prices that could impact deficits and the rather predictable returns that fixed-income products are providing.

Under the circumstances, debt fund managers are not promising the moon. Most of them, however, tend to agree that the average investor (who has, perhaps not unjustifiably, aggressively chased stocks till recently) needs to take a fresh look at the entire gamut of debt funds.

Those who are aware of the reality argue that debt products help in spreading risk over assets other than equity. After all, it is much too dangerous to load one's portfolio with huge chunks of equity (or any one class of assets). Also, exposure to fixed-income may play quite a constructive role in the context of uncertainty - particularly when long-term wealth building strategies have to be fine-tuned.

Right at this moment, the case for debt funds seems to be getting stronger. However, as fund houses agree, investors must remain aware of their limitations as well. But, generally speaking, it will be fairly okay to expect reasonable returns through a diversified basket of fixed-income instruments.

For more on these issues, let us zero in on Mr Sameer Kulkarni, Portfolio Manager, Fixed Income, Fidelity MF, who will soon begin to oversee Fidelity Short Term Income Fund. Investors, he notes, may not expect wildly divergent numbers from various similar debt allocations.

In other words, returns generated by two comparable products may not be too different from each other. Nevertheless "quality of assets will be a big differentiator in this case", Mr Kulkarni says, adding that in the universe of debt funds, short term funds present a fairly decent alternative to unpredictable equities.

Let us also check out suggestions by ICICI Bank's private banking division, which has told clients that investors may avoid income or gilt funds as these are likely to under-perform shorter-maturity options on a risk-adjusted return basis.

"It would be prudent to maintain allocation to shorter-maturity products like liquid funds, floating rate plans and short term plans. Bank FDs continue to remain a good investment option, considering the assured returns," it has pointed out.

This view, we are sure, will find support from many quarters, including those that have been lately moving away from equity and piling up their debt exposure instead.

The trained eye has in fact already spotted the rising bank FD rates. A few of the smarter ones have come out with prominently-placed advertisements, announcing the new rates. Are sizeable inflows into these products happening already? Will more banks start offering better, steeper rates? These are queries that even MF watchers would want answered.

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(This article was published in the Business Line print edition dated August 7, 2006)
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