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| With the equity markets booming, debt funds are clearly feeling the heat. With interest rates also seemingly bottoming out, the outlook for the debt markets is not encouraging. |
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| However, there are some positives for debt funds even in this murky scenario, says Rajiv Anand, head - investments, at Standard Chartered Asset Management Company. |
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| What are your views on interest rates now that the RBI has decided to leave them unchanged? |
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| I think what Dr Reddy (RBI governor Y V Reddy) has done is really a reaffirmation of the April Credit Policy wherein the bias - as far as interest rates go - is clearly soft. |
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| More significantly, inflationary expectations have now been reduced from 5-5.5 levels to 4-4.5 levels. The window for the rate cuts has been left open in that sense, especially if liquidity in the markets continues to be strong. |
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| If one looks at interest rates in our country, one can safely say that in the medium-term interest rates will continue to remain soft. If certain conditions fall in place, interest rates could even drift lower from the current levels. |
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| Would you say that interest rates have bottomed out? |
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| If one looks at the global scenario, economies across the globe are looking up. Economic growth numbers in several economies, including US and in Asia, are on the rise. |
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| To that extent, the easing cycle we have seen in terms global interest rates seems to be over. Having said that, short to medium term, interest rates will be on hold globally. And if the growth that we have seen continues over the next three-six months we could see hikes in world interest rates. |
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| We have already seen hikes in interest rates in England and Australia, though that is more because of asset pricing issues. |
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| Perhaps the next move in interest rates, especially in US, will be upwards, but that will probably happen in the second half of 2004, if not later. In India, ample liquidity and benign inflation will keep interest rates soft. |
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| What do you think are the benefits of investing in debt funds in today's scenario? |
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| As long as debt funds are able to provide you better returns on a tax-adjusted basis as compared to bank fixed deposits, money will continue to flow into debt funds. |
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| Today, there are various types of schemes across various maturities capable of catering to every risk profile. |
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| To that extent money will continue to flow into debt funds. I don't think the story is so much about debt versus equity. Debt funds are focusing more on the difference between the size of the debt fund market and that of the bank fixed deposit market. |
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| Debt funds are just 8-9 per cent of bank deposits. That is the space debt funds are focusing on. You will see incrementally more money flowing into the equity markets, because of the relatively lower returns offered by debt funds. But that does not mean money will not flow into debt funds. |
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| Do you expect debt fund returns to ever rise to the levels achieved two-three years ago? |
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| No, that is unlikely. What investors have benefited from is a structural change in the interest rate environment in the last three years. It is unlikely that one will see that kind of returns any time soon. |
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| What would you be cautioning investors about when investing in debt funds? |
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| The expectations about debt fund returns need to be tempered. It would be unwise to expect the same kind of returns as compared to two-three years ago. A large percentage of those returns came out of the capital appreciation one got out of bonds. |
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| Going forward the capital appreciation portion will not be substantial. But even then debt fund returns will probably be better than bank fixed deposits. Today there are various types of debt products which are comparable to bank deposits. |
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| For instance, you can compare your savings account with a cash fund and the latter will be better than the former. Short-term funds can be pitted against 90-day fixed deposits while long-term funds can be compared against one-year fixed deposits. |
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| Throw in tax benefits and higher liquidity and transparency levels the funds provide you and it is clear that debt funds are a superior investment option in the fixed income side. |
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| Can you tell us about Standard Chartered Mutual Fund's products and how they have performed? |
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| Standard Chartered MF is the only focused debt fund house in the markets. All our funds compare favourably within its peer group. The performance of all our funds has been consistent over the last three years. One of the things that we pride ourselves on is the product innovations that we have brought to the markets. |
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| For example, our short-term fund is an innovation that we brought into the markets. The dynamic bond fund is another unique scheme that we launched, as also our latest offering, the medium-term fund. |
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| On the customer service side, we were the first to launch a daily fund factsheet which brought a new level of transparency to the fund industry. |
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| Redemptions are on a T+0 basis on all our short-term funds in most of the centres that we operate. For long-term funds, redemptions are available on a T+1 basis. These innovations have played a role in raising the service standards of the Indian mutual fund industry. |
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| What has been the response to your floating rate fund? |
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| The initial response to our floating rate fund had been very good given the fact that we launched it in a volatile interest rate environment. But now that we are in a soft interest rate regime, the response to the floating rate fund has not been as much as one would have liked it to be. |
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| However, the fund is likely to see substantially higher response if and when the interest rates go up and the markets become volatile. The floating rate fund is the only fund in our products which will improve your returns when interest rates begin to move up. In that sense it is an ideal product to have in one's fixed income portfolio. |
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| What sort of timeframe do you recommend for a debt fund investor? |
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| We typically recommend the cash fund for a timeframe of seven days, the short-term fund for an investment horizon of three months, the medium-term fund for six months and the long-term fund for at least an year. |
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| What is going to be your investment strategy in today's market? |
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| We adjust our portfolios based on our 3D factor process which looks at 14 factors which drive interest rates rather than being driven by short-term market noise or trends or fashionable themes at any point in time. |
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| Portfolio allocation is a continuous exercise. It happens on a day-to-day basis. We do not work towards any particular goal in this regard, because the dynamics of the markets could change substantially during any given timeframe. |
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