'Listing securitised papers will push up volumes'

Q&A: Suresh Soni

on how mutual funds can benefit from the proposed changes in the country's corporate debt market. Excerpts:

After a gap of around six years, a few fixed income schemes are giving double-digit returns. How do you read the scenario?

Basically, retail investors are getting attracted to fixed income schemes. In the last six months, interest rates are up by 250-300 basis points. Yields on the government securities have also gone up by nearly 50 basis points.

This is a result of the central bank's measures to contain inflation, which has been scaling northwards. Lately, the interest earned by actively managed portfolios is lesser, while it is better for fixed income schemes. We are now in a position to offer more predicted returns for these schemes and the change is reflected in the rising retail participation in these schemes.

There is a lot of talk about the revival of the corporate debt market in the country...

The corporate debt market is underdeveloped. It is virtually non-existent for bonds with lower ratings. Around 95 per cent-plus deals involve the AAA-rated securities and below that, there is hardly any trading volume.

Besides, the volume is not much within the AAA deals. We need to focus on this issue. Listing of securitised papers, which were not allowed earlier, is a welcome step. Many entities buy only listed papers. It is not that they would now be trading aggressively, but the volumes will pick up as listings take place.

Fixed maturity plans (FMP) have been big money-spinners for mutual funds. With pockets filled up with fresh FMP inflows, can the funds tap lower-rated securities?

There is nothing wrong in investing in lower-rated securities as long as the fund values the fundamentals and has mentioned this investment option in its prospectus. In Western countries, there exists a market even for BBB+ bonds and speculative-category bonds. The Indian industry is doing well.

For the past many years, there has been no default on AAA- as well as AA-rated bonds of a tenure of one year. Fund houses can take a call on putting money in these instruments. But default rate could be a little higher for bonds of a longer tenure.

But funds even parked up to 95 per cent of their FMP money in with bank deposits...

Sometimes fund managers find it a flexible option to put money in the banks than immediately flushing it into the bond market. Most of the time, liquidity plays a crucial role in such decisions.

Bank FDs are available even for a shorter duration of one week, which is very beneficial for managers at the early stage of the scheme. There has been a combination of these options. Earlier, there was no cap on parking funds. Now, there is a limit and funds have to scale down their exposure to the permitted level.

Don't you think debt-oriented schemes, which are stable in giving returns compared to equities, need innovation?

This is partially right. Fixed income schemes lack innovation. There have been a few attempts such as a bond fund or a money market fund. Products can come either from the credit category or from the interest rate spectrum.

But, we have to wait for the launch of complex products. Derivative-based products will take some time to hit the market.