Debt MFs turn attractive as rate likely early next year

Fund managers expect equity and debt returns to converge in the short term

Debt mutual fund schemes are likely to see increased investor interest, with the Reserve Bank of India (RBI) hinting at interest rate easing in early 2015. Some fund managers are expecting the returns of equity and debt to even converge over the next six-12-month period. The benchmark 10-year government bond closed at 7.96 per cent, a level last seen in August last year.

Experts say bond yields are expected to continue with their downward trajectory taking comfort from monetary policy statement that “a change in the monetary policy stance is likely early next year”.

Fund managers are advising investors to continue with the existing debt investments. They say increasing the portion of debt component in their portfolio would be prudent, as the equity market returns could taper in 2015 following a sharp 35 per cent gains this year.

Along with capital appreciation, experts say, certain debt schemes could even deliver up to 15 per cent returns. That’s similar to returns expected from benchmark indices in 2015, according to some foreign brokerages.

However, investment advisors are advising not to go overboard with debt investments, as there is little chance of them triumphing over equity in the long run. “Though in the next six-month to one-year horizon, returns from equities and debt may converge. But beyond that equities will overtake,” said Lakshmi Iyer, chief investment officer- debt, Kotak Mutual Fund. “Those who have investments in debt funds should stay put or even make fresh allocations at current levels,” she said.

According to fund managers, fixed-income products with high duration — between three and five years — are poised to benefit the most.

“We continue to run high-duration debt across schemes, and believe that time is right for investors to continue building duration in their portfolios,” said Rahul Goswami, chief investment officer (CIO) - fixed income, ICICI Prudential AMC. “Since over the time the curve is expected to steepen, products like short-term plans and credit funds like corporate bond funds, focused on medium duration, are also very attractive.”

Fund managers said they had already started “adding duration” in the last few months.

According to Vidya Bala, head (mutual fund research) at FundsIndia.com, investors with more than two investment horizons should opt for funds that invest in a mix of government securities and corporate bonds. “While pure gilt holdings could be risky for retail investors, as they require an active profit booking strategy, income/dynamic bond funds, which have upped their portfolio maturity and also hold some good corporate bonds with profitable spreads should deliver adequate returns without too much risk,” she said.

Fund managers say investments made in debt schemes will not keep up pace with what equities are likely to offer in years to come.

The assets under management (AUM) of debt funds, including income, money market and gilt schemes, was close to Rs 8 lakh crore as on October 2014. The total AUM of the domestic mutual fund industry is about Rs 11 lakh crore.

Investment advisors say debt mutual funds will offer steady and risk-free kind of returns to investors in coming years. However, investors with high return expectations will have to opt for equity funds. “From asset allocation perspective, investors can always go ahead for debt products. But if they have high expectations than better to opt for pick equity funds,” said CEO of a large fund house.

According to him, in the last one year, debt products have already returned nearly 10 per cent and over a longer term period could continue to remain in this range.