As the government amended the indexation and taxation rules on mutual funds containing less than 35% exposure in equity, Sandeep Yadav, Senior Vice President, Head – Fixed Income, DSP Investment Managers, shares his outlook on the debt mutual fund market, his outlook on bonds and more, in an interview with FinancialExpress.com.
What is your outlook on debt mutual funds following the debt indexation announcement? What is your opinion on the impact on other funds, such as gold, target maturity, or others that have less than 35% equity?
While there will not be much impact on lower duration funds, we will certainly see timid growth in longer duration funds which are used by investors for taxation benefits. Target maturity funds may be impacted more significantly than other funds, but as stated before the other types of funds will also have a negative impact.
Why did the government propose this in your opinion?
There could be multiple reasons, though I am not sure which one is correct. Now the debt funds are on par with the direct G-Sec investment. Maybe the government feels that this action will increase retail participation in Gsecs. Also, the banks have lately had difficulty in raising deposits. This action will be good for such banks. But without a clarification from the government or regulators it is difficult to determine the reasons.
What does this mean for the debt MF sector? Bond market?
India is a growing economy, and financial inclusion is still limited. While such action will lower the expected growth, but the MF market will still grow Hybrid funds that offer a mix of debt and equity should be and to replace much of the lost demand in pure debt. Bond market will see a reduction in market depth and breadth leading to lower liquidity.
What type of bonds will be most impacted, long vs short-term; govt, state govt, corporate?
Impact will largely be on corporate bonds. MFs have a larger share in the corporate bond market than in G Securities/SDL. I expect the 3-5 year segment to be most hit as MFs have the biggest exposure in this segment in duration funds.
Will investors move to other forms of fixed-income as a result of this, or will they move out of this asset class since debt MFs were one of the easiest ways to access the debt market?
Many Investors will most probably gravitate towards the hybrid funds as they already must be having asset allocation across these assets. The new regulations will make them combine these assets in one fund rather than in debt and equity separate. The ones who want only debt will continue in debt MF as it is now at par with any other debt vehicle.