Retail investors warm up to debt Mutual Fund

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While SIPs are being increasingly used for investment in equity schemes (PTI) While SIPs are being increasingly used for investment in equity schemes (PTI)
SummaryWhile SIPs are being increasingly used for investment in equity schemes

While SIPs are being increasingly used for investment in

equity schemes, the compelling case for an SIP continues for investment even in debt schemes, provided that the same is carried out regularly and for a horizon which transcends over a medium/long period of time, says Debasish Mallick, managing director & CEO of IDBI Mutual Fund in an interview to FE’s Saikat Neogi.

In the past couple of years, mutual funds have been promoting opportunities in debt among retail investors. But after July 16 when the interest rate was reversed by the RBI, investors incurred huge losses and their confidence was shaken. Do you think that confidence is returning back now?

Debt schemes of mutual funds have traditionally been an investment opportunity pursued by the institutional and high net worth (HNI) investors only. Except for some participation in fixed maturity plans (FMPs), retail investors have not been active in debt fund schemes. With emerging opportunities in the debt market, particularly by way of expected rate cut, mutual funds have been promoting debt schemes as an investment option for retail investors. There are indeed very attractive opportunities in mutual fund debt schemes for retail investors, starting from overnight investment in liquid funds to duration debt products like, gilt funds, income fund, dynamic bond funds, etc.

Such opportunities can be pursued with small amount of investment also.

With continuous effort on the part of the mutual fund houses, retail investors have started to warm up to the idea of investing in debt schemes. Investments have started coming in, not yet in large numbers and amounts, but encouraging trends were definitely visible. The policy changes initiated on July 16 have brought in quite a change in the market and perception about debt products, at least for the time being. The adverse currency movement has no doubt abated, the macro expectations in terms of current account deficit and core sector IIP numbers are today definitely looking better. There is hope and expectation of an economic turnaround. However, with persistent inflation, the expectation of rate cut appears to have receded.

The duration debt products will now have to wait for their turn, and retail investors may not like to take active position in such products. Liquid funds and FMPs definitely continue to present attractive investment opportunities. Retail investors can actively look at these products as a low risk and attractive investment option in debt schemes. Investors can also look at other short duration debt products, like short-term debt schemes of mutual funds.

Even the hike in dividend distribution since June has come as a double whammy for debt investors? Do you think there is a case for a relook given the kind of losses investors have incurred in their portfolio?

The hike in dividend distribution tax has, to a certain extent, reduced the relative attractiveness of mutual fund debt products. Deepening of the secondary debt market is an integral part of development of capital market, and is necessary for economic growth. As return on mutual fund debt schemes are not guaranteed and are also uncertain, it is desirable that they carry suitable tax incentives so as to remain attractive to investors. Quite apart from the losses suffered due to the policy changes, there is a case for revisiting the dividend distribution tax on all debt schemes of mutual funds, to enhance the attractiveness of these products to retail and other investors and thereby deepen debt markets.

Typically, for a salaried individual who keeps idle money in savings account or opens a recurring deposit in a bank, what kind of debt mutual fund product offering should he look at as favourable tax efficient investments options?

Mutual funds offers very attractive debt products, which can be considered by salaried individuals for superior returns with low risk. The products are also tax efficient, in that the applicable tax rate becomes much lower, giving rise to a higher post tax returns. Liquid fund schemes of mutual funds present an excellent opportunity to deploy your surplus money for a short period of time — even overnight — without loosing liquidity. The proceeds of such schemes are invested by the mutual funds in good quality paper having adequate liquidity in the market. These papers usually yield an attractive carry, giving good and tax-efficient returns to investors. There is no exit load and investors can exit as soon as they want. Ultra short-term funds also provide quite similar benefits to investors for short-term deployment/investments. At the prevailing rates, these products do not only generate yields higher than savings product, but also than recurring deposits of comparable maturity.

An investor looking for a low-risk attractive yield longer duration investment, spreading over an year or beyond, can invest in FMPs, where the returns are usually higher than the prevailing returns in guaranteed debt products. Further, investors in FMPs can avail benefits of indexation, which can bring down the tax impact significantly, for investment in mutual fund debt products with maturity of one year and above.

Apart from these debt products, which yield relatively attractive returns, without being significantly affected by market conditions, opportunities could be available in duration products, like gilt fund, income fund, dynamic bond fund, short term bond fund etc, at various points of time depending on evolving market conditions. In view of limited familiarity and popularity of these products, it is desirable that investments in such products are made on the basis of professional check/advice.

Given the current market dynamics, what duration advice will you give to investors wanting to put money in debt?

The prevailing rates appear more elevated from the longer term perspective of development objectives. It is, therefore, tempting to conclude that there is a possibility of rate cut over the medium term and, thereby, suggest a duration debt product. However, there are quite a few uncertainties in the global and domestic economy. Inflation is persistently high in the country. There is an added uncertainty on the political front with the impending elections. We feel that the macro policy perspectives, which could have a significant impact on the return in debt schemes, is uncertain. It is therefore, not desirable to consider duration debt products especially by retail investors, at this juncture. Investments in liquid fund schemes and FMPs, which are evergreen products can be considered for investment at this stage also.

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