Bond yields have crossed 8% after a very long time. Before the start of this big equity bull run, debt was the flavour of the season as it gave 11-12% returns. But then it fell off as interest rates started coming down and the whole game switched over to equity. But with interest rates on the climb again, are debt funds ready to stage a comeback? Head investments at Standard Chartered Mutual Fund, Rajiv Anand shares his views.
There are indications of interest returning into debt funds.
Not into long-term bond funds. But now, liquid funds give a return in the vicinity of 6.5%, which is attractive. Especially with one-year rates in the vicinity of 8%, fixed maturity plans certainly look attractive. So risk free rates today are in the vicinity of 7.5% to 8% for a one-year investment.
One begins to see a bit of interest atleast in those asset classes within the fixed income side, which does not give volatility. I certainly see lot of my sales team spending a lot more time with fixed income fund managers than they did in the last one-year. So that is an indication that some interest has begun to come into debt.
Today the fixed maturity plans across mutual funds is in the vicinity of about Rs 30000 crore. So that is an asset class, which certainly has become attractive for investors. What this basically does is that there is a greater level of predictability of returns for investors because it is a close-ended fund with a set maturity of either 90 or 180 days. So therefore the investor has predictability of returns.
Second, as opposed to a fixed deposit these give capital gains benefits meaning that if one holds it for more than one year, one will get only 10% capital gains as opposed to a full 30% that one pays on fixed deposits. So on a Post Tax basis in fixed maturity plans; the volatility is significantly lower and the Post Tax returns are certainly attractive.
No, we have not seen any significant redemption from our equity schemes and if one looks at the numbers in terms of what mutual funds have sold over the last month or month and a half; the numbers are not significant to indicate that we have seen big redemptions and therefore a fundamental shift out of equity into debt.
I do not think it is still time for long-term bond funds. Yes, 8% is a psychological level on the tenure but we probably held a little higher. So to that extent we are recommending investors to continue investing in either liquid funds, short-term funds or fixed maturity plans. I think it's still not time for long bond funds.
I think liquid funds should give you anything in the vicinity of 6. 25% - 6.50%. There is the probability that short -term rates will head a little higher. So going forward, those could get little more attractive, may be 6.50 is something we can expect. Today I think they are in the vicinity of about 6.25. A 90 day maturity plan would be in the vicinity of 6.50 - 6.75. One year maturity plan would be somewhere in the vicinity of 7.50 - 8% and two year fixed maturity plan would be somewhere between 8 - 8.50%.
These are all pre-tax returns; one needs to adjust a little bit for costs, 25-30-35 bps here and there is the adjustment for costs. But I think broadly that would be the vicinity.
StanChart Enterprise Equity Fund raised about Rs 1430 odd crore. The objective there was that it would give us an index plus kind of return, with the plus coming out of IPOs. We continue to be invested almost entirely in cash at this point in time. We are invested 90% in cash. Obviously we haven't participated in the IPOs that have gone by as well. We will look to invest that into the Index as and when IPOs begin to kick in again.
It would vary between 5 - 10%, nothing more than that. We re-jigged portfolios a little bit in the last one-month and half, but from a cash basis it is about 5 - 10%.
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