Sliding Debt, Equity Pare Navs In 2 Weeks

Falling debt and equities have eroded net asset values (NAVs) of mutual funds (MFs) over the last two weeks. All the four categories namely, equity, balanced, debt and gilt, have reported a drop between 0.5 per cent and 9.5 per cent during the period.

At least 4 of 10 schemes in each of the four categories reported a larger drop than the average drop in each category. Weak sentiments in the market owing to the Indo-Pak stand-off has seen investors taking a cautious approach.

The least erosion was in gilt schemes, which reported a average drop of 0.5 per cent. While equity schemes were the worst, reporting a drop of 9.5 per cent over the period. Balanced schemes' NAVs slipped by an average 6.1 per cent and debt schemes by 0.6 per cent.

However, most fund investment experts believe that investors should not react strongly to the present situation. Nevertheless, bonds have already recouped their losses and are trading at levels seen before the escalation of tension.

Dileep Madgavkar, chief investment officer, Prudential ICICI Mutual Fund, said, "The fundamentals have not changed. Investment decisions based on research and analysis of businesses offer attractive investment opportunities for longer period. Short term fluctuations are bound - and can be very sharp at times - but would not alter the outlook."

Prem Khatri, vice president-marketing, Pioneer ITI Mutual Fund, said, "In the short term, border tensions will no doubt have an impact on the direction of the equity market. But investors should not let such fears immobilise them. The reasons for optimism are simple : both valuations and fundamentals look attractive. Investors should, in fact use these dips in the market to buy equities or better still a diversified equity fund with a good track record."

Rajeev Anand, head-investments, Standard Chartered Grindlays Mutual Fund, said, "Past experiences have proved that after a reaction to similar event, the market has recovered strongly, and thus in long term the outlook is positive specially with strong fundamentals and lower interest rate."

A number of events had already resulted in the recent turbulence in the gilts market. It began with the credit policy announcement and subsequent statements by the central bank, effectively ruling out any rate cut for six months. Since then, the co-operative bank scandal and border tensions have only dampened sentiments.

Khatri adds, "While volatility over the short term cannot be ruled out, however, given that more than 70 per cent of government borrowing has to take place, the central bank may take more easing measures. Moreover the liquidity situation should be aided by the fact that the quantum of borrowing by the government in the next two months is not very high. A substantial downside in debt market from current level is not expected."