The Telegraph
Monday , April 20 , 2015
 
CIMA Gallary

Debt dreams

- The current rate-cut cycle may bring bond funds back in favour, feels Nilanjan Dey

Far away from the hurly burly of equities, bond funds are drawing new followers, thanks to investors' liking for restructured debt portfolios, following macro changes spurred by a decline in interest rates.

Investors these days are seeking to derive optimum benefits from a mix of smart strategies. The latter, for some of them, include rebalancing longer term holdings in favour of funds that mostly hold government securities and Triple A-rated issues.

Others are trying a less conservative tack, enhancing allocation to accrual products with a view to gaining relatively better absolute yields from the non-AAA corporate bonds segment.

These portfolios are managed on an accrual basis which involves buying securities and holding till maturity, thereby bringing in the accrued interest.

In this context, it may make sense for investors to earmark a part of their surplus exclusively to need-oriented debt products.

In fact, any bulk quantity of money that can be spared may be temporarily parked in a liquid fund in order to do graded investment in a mainline debt fund at opportune moments.

Further, regular transfers to another desired destination (typically, to a bank savings account) after bulk investment may also be considered.

All this may actually be done in a pre-meditated and organised manner using a Systematic Transfer Plan (STP) or Systematic Withdrawal Plan (SWP) as the case may be.

Alternatively, normal SIPs or Systematic Investment Plans may be started keeping their requirements in mind. I must mention here that STP and SWP are tools that most investors have by and large ignored in the past years.

The average investor may consider these actively, provided he has a clean understanding of their mechanics. All probable tax implications of such systematic action (as well as the costs) must also be taken into account.

Why restructure?

The answer lies in the rate-cut cycle, which is currently underway in the Indian economy. In the backdrop of rates that are generally declining, medium and longer term debts are expected to do reasonably well in the days ahead.

The market, it is evident, is ready for further cuts in rates. The fact that inflationary forces are somewhat tamed is working seriously in RBI's favour.

Rate cuts, incidentally, have already made a palpable difference to investors who depend on fixed deposits for earnings.

Fixed deposit rates are generally lower than what they were even six months ago, a trend that is likely to gather steam in the days ahead. Fixed deposits, it seems, may well lose some of their relative merit vis-à-vis well-managed debt funds.

All investors need to examine their debt holdings and ascertain for themselves whether these are sufficiently tuned to the dynamics of the market. If the answer is negative, this may be the right time for a quick round of restructuring.

Those who wish to participate actively may take note of the following trends:

• Interest rates are by and large favourable

The number of corporate issuances is fairly high, and the trend is expected to sustain in the days ahead

The extent of institutional participation in private bond issues in recent times is worth noting.

There is considerable action in the secondary market for select corporate paper, resulting in greater trading volumes.

Here, let me mention that according to a certain estimate, private issuances of corporate bonds was at Rs 3.15 lakh crore between April 2014 and January 2015, which represents a significant increase (reportedly more than 40 per cent) on a year-on-year basis.

Now, given the softening of rates, income funds are expected to woo a larger section of investors. Remember, many of the latter have missed the earliest opportunity of the season, marked by the Reserve Bank of India's most recent decisions on rate cuts.

However, debt funds, as a consequence, have displayed considerable buoyancy, which is evident in their latest performance.

The interesting point to note is that the market actually seems to be ready for fresh cuts, which many say will start happening in the none too distant future. Naturally, the central bank's ability to soften inflation further will be a critical factor in the days to come.

I must also state here that global fuel prices are considerably lower at the moment, a trend that has helped India in many ways. As a crude importing nation, our capacity to tame our current account deficit will be closely monitored by market forces.

Do it now

The right time to start is now. This classical statement must really be reiterated as some quarters, especially debt fund investors, are yet to make up their minds with regard to their income portfolio.

However, if you are an early-bird, you should keep in mind four compelling points:

Identify the right income funds in sync with your risk appetite. Allocate a part of your surplus and set up SIPs as follow-up action

Create a portfolio that will give you adequate capital appreciation and regular, stable inflows. Make sure there is sufficient diversification within your debt holdings

Monitor RBI action and track all signals on the next rate-cut. Holding a mid- to long-term view may be important for you. A protracted stretch of time is more likely to fetch you reasonable returns. At the same time, however, there is no reason to harbour overly irrational expectations on performance.

The process of selection must never ignore risk factors. An aggressive stance is most likely to automatically embrace higher risk

Which fund to choose?

This happens to be the most vital question of the day. There is no single or universal answer, remember; each investor should choose for himself. Nevertheless, a debt fund may be normally judged in terms of its credit quality - the credit ratings assigned to its holdings will give you the right clues.

As things stand, most investors are likely to look for steady income and capital growth, particularly over the next few quarters.

Competing asset management companies offer a number of debt products. In so many cases, they chase the same kinds of securities. However, the right fund manager will make a difference by delivering superior returns over a period of time across market cycles.

The author is director of Wishlist Capital Advisors

 


 More stories in Business

  • Land bill pitch before politicians
  • Shield against MNC tax tiffs
  • Home loan sellers see credit bulge
  • Different note on Net neutrality
  • Diesel drives Honda sales
  • Skipper growth path
  • Ministry seeks list of wilful defaulters
  • Q & A
  •