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Debt funds lure investors as shares tumble

A steep tumble in Indian share prices over the last financial year has driven money from equity mutual funds into safer debt funds and the trend seems set to continue, fund managers said.

"The trend has emerged because equity markets have been more volatile, causing retail investors to shy away," said S K Basu, executive director of the country's largest mutual fund, the Unit Trust of India (UTI).

Over the last financial year (April-March), the benchmark Bombay exchange's benchmark index fell nearly 28 per cent to 3604.38 points from 5001.28.

The yield on the benchmark 10-year government bond is close to a historic low, ending March at 10.33 per cent compared with 10.76 per cent a year ago. Bond prices and yields move in opposite directions.

"Debt schemes are preferred because they offer assured returns," Basu said.

Data from the Association of Mutual Funds of India shows that assets under management fell to Rs 1.02 trillion at the end of February 2001 from Rs 1.13 trillion at end-March 2000.

But while overall funds under management had declined, funds invested in debt had risen.

Data from Securities and Exchange Board of India (Sebi), shows that Indian mutual funds were net sellers of equity while they were net buyers of debt.

Net equity sales in calendar 2000 totalled Rs 6.94 billion compared with net purchases of debt worth Rs 39.99 billion.

So far in 2001, net equity sales were Rs 23.58 billion while net debt purchases were Rs 16.43 billion.

"Typically, Indian investors used to invest predominantly in equity funds," said Suresh Soni, vice president at Kothari Pioneer Mutual Fund.

"Till about a year back, the equity market was so overwhelmingly bullish, there wasn't a significant interest in debt. But the technology meltdown has been a sobering experience. Investors are talking of diversifying portfolios," Soni said.

Kothari Pioneer, India's largest private sector fund, has seen debt mobilisations surge to Rs 8 billion from Rs 3.5 billion a year ago.

GOOD TIMES SEEN FOR DEBT FUNDS

With Indian share prices looking set for further volatility in the near term, the outlook for the debt market is positive to stable with no pressure seen on rates.

There could, however, be some volatility in yields due to a huge government gross market borrowing programme for 2001/02, budgeted at 1.19 trillion rupees.

"It is a highly volatile market, if you have the patience this is the time to get in," says Nilesh Shah, chief investment officer at Franklin Templeton Investment Ltd which manages around Rs 23 billion in debt schemes.

Debt analysts say there are no immediate concerns on the interest rate front, with central banks easing monetary policy globally, the Indian rupee looking stable and ample domestic money market liquidity.

Investments in debt funds were also attractive as the budget for 2001/02 halved the dividend tax on income from debt funds to 10 per cent, analysts added.

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