Thursday, August 1, 2013

Wht Debt Fund?

Wht Debt Fund?

Even today a conservative Indian investor continues to confuse mutual funds with equity. It is precisely because of this lack of understanding that they miss on the superior risk adjusted returns, easy liquidity and tax benefits that fixed income funds have to offer. Today 72% of the aggregate AUM of the mutual fund industry in India is invested in debt funds, thus marking the prominent position that fixed income funds hold in the asset management space.

While most retail investors do have a fair idea of the conventional financial instruments such as Bank FD’s, G-Sec, company NCD’s, they seem to be unaware of the fact that fixed income funds in India in fact invest in various combinations of these instruments only. 

The portfolio exposure(as of Nov’12) at the industry level shows that of the entire fixed income AUM ~10% is invested in G-sec, 53% is exposed to corporate securities and ~36% is invested in Bank FD’s. It is thus, important to understand that fixed income funds are nothing but a conduit to invest in such securities, only in a more efficient manner. Not only that, the investor through these funds gets the opportunity to choose from various schemes depending on his risk appetite and the desired tenor. He can custom make for himself a healthy salad by choosing from liquid fund, liquid plus funds, Short term income funds, GILT funds, income funds etc.

But is variety a good enough reason to shed the conventional thrift habits and shift to savvy fixed income funds? Certainly not, but who says that’s all. Fixed income funds have much more to their merit.

Sound investment philosophy germinates from prudent portfolio diversification, and that is exactly what debt funds do. The idea is to invest in the right securities at the right time and in the right proportion to garner the highest return every time. Such a task requires expertise and skill which a retail investor may not possess due to his distance from the intricacies of the market.

While a typical Indian retail investor is always more keen to invest in bank FD’s, what usually skips his mind is the threat posed by volatility in the inflation trajectory, which is inevitable in a developing economy. So when you lock in your money for a fixed tenure at a certain rate with a set anticipated trajectory of inflation that allows you to earn positive real return on an FD, the math completely falls apart if inflation starts to misbehave and eats into your returns. It is here that the flexibility and agility of the fixed income funds play a pivotal role in securing better real returns through prompt portfolio allocation.

Very often investors start comparing pre-tax current return on FD’s with the past performance of various debt schemes and jump to the conclusion that FD’s are better. But that’s incorrect. What they should technically compare is the post tax return on FD in the same time span for which they are looking at the return on debt schemes. And once they do start comparing apples with apples, they’ll see how tax adjusted returns from debt funds are superior to those offered by bank FD’s.

Apart from these, the ease of liquidity that fixed income funds offer vis-à-vis bank FD’s and the like cannot be over looked. If you withdraw your money before maturity from an FD, you are liable to a monetary penalty, but, if you have invested with a debt fund you can redeem your units anytime you like without losing the gain accrued to you till that date! The same applies in case of pumping in small savings. Imagine opening an FD for Rs 2000-3000 every month!!

It is then difficult to justify as to why the retail investor participation in fixed income funds in India so low, even when the institutional investors are in fact making good returns from the same. The usual answer is the fee that they are charged. But is that a reasonable justification? You are ready to pay a doctor his fee for your diagnosis, even when you have the option if using the tried and tested nani maa ke nuskhe, then why this discrimination in case of financial services? The most nominal fee that the fund houses charge is for the expert guidance that they provide as the care taker of your money while bearing the huge onus of delivering superior returns time and again.

I think it’s time the retail investors, for their very own benefit ,move on to fixed income funds and take advantage of professional fund management expertise at low costs, which is already benefitting their institutional counterparts.

Vcare Investment Services Pvt ltd
201 Sai Sadan 76/78 Modi Street, 
Fort, Mumbai 400001


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