Sharvari Patwa

Mumbai, July 31 Mutual fund debt schemes – both fixed maturity plans and liquid schemes – seem to be finding favour among both investors and fund houses as interest rates continue to harden.

The number of offer documents for debt schemes filed with Securities Exchange Board of India (SEBI) has increased three-fold since May. And, in the past three months, mutual funds have been net buyers of debt for around Rs 25,621 crore.

More than 50 draft offer documents for debt schemes were filed with SEBI in July so far, according to the data collated by Value Research.

In July (up to 30th), mutual funds were net buyers in the debt category to the tune of Rs 5,149 crore, 50 per cent higher than the same figure for June. In the same month, the fund houses were net buyers of equities for around Rs 1,233 crore.

In a scenario of economic uncertainty and rising interest rates, investors prefer to go in for short-term accrual assets, as the maturity period is less for such products, said Mr Ritesh Jain, Head-Fixed Income, Principal PNB Asset Management.

The current interest rate environment and rising yields will suit investors who are looking to invest in fixed income funds; the demand for FMPs is likely to gain further momentum from both retail and institutional investors, said a fund manager.

While the diversified schemes on an average have given negative returns of around 17 per cent for the three months spanning May-July 2008, the short-term debt schemes have given around 1.13 per cent return; debt liquid plus schemes a return of 2.09 per cent return and FMPs a 1.49 per cent return during the same period, according to Value Research data.

A transformation is happening in the case of mutual funds, where they are shifting to lower duration schemes to take advantage of the rising interest rate scenario, said Mr Sujoy Kumar Das, Head of Fixed Income, Bharti Axa Investment Managers.

According to analysts, mutual funds prefer to stay away from bond markets as bond prices are falling on the back of rising interest.

Schemes with long- or medium-term maturity have fallen out of favour with investors as they give lower returns, with bonds depreciating in value, said Mr Dhirendra Kumar, CEO, Value Research. FMPs are close-ended products with different maturities. But those investors who may want to withdraw the money in the interim-period ought not to invest in them, warned an analyst. “Our last FMP collected around Rs 800 crore and we plan to collect around Rs 1,000 crore from an upcoming FMP scheme,” said Mr Parijat Agrawal, Head-Fixed Income, SBI Mutual Fund.

The current range of debt funds are quite comprehensive straddling different asset classes and maturities (gilt, long bond, floating rate, short term, ultra short and money market funds). Apart from the FMPs, there is unlikely to be a spurt in new fixed income funds,” said Mr Santosh Kamath, CIO-Fixed Income, Franklin Templeton Investments.

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