Debt funds grow faster in first half

Assets under management (AUM) for debt schemes have grown more than the assets for equity schemes in the period from January to July 2007, even though the Bombay Stock Exchange's Sensex grew 11.5 per cent in the period.

While total AUMs shot up by as much as 43 per cent between January to July, AUMs of debt schemes increased by 65 per cent. AUMs of equity schemes have shown a slower growth, increasing by merely 17 per cent. Fund managers attribute this to higher indicative yields on fixed maturity plans between January to March 2007, and lower overnight rates.

"High rates in March- April 2007 led to inflows in fixed maturity plans from corporates as well as retail investors. In June- July, overnight rates went close to zero and banks turned large investors in liquid funds.

Subsequently, banks have withdrawn funds in August after credit policy due to higher CRR requirement and because call rates went back to 6 per cent plus levels," said Sandeep Bagla, Chief Investment Officer-Fixed Income, AIG Investments.

The spate of new fund offerings (NFOs) shows a marked trend towards debt schemes. The period from January to June 2007 saw 41 NFOs on the equity side, which collectively raised Rs 16,501.13 crore as compared to 576 NFOs on the debt side raising a total of Rs 1,00,578.81 crore, according to Value Research data.

Fund schemes like Reliance Equity Advantage and UTI Lifestyle schemes, which closed their NFOs in July 2007 collectively mopped up close to Rs 4,000 crore. Subsequently, the 30-share index dipped, falling by 9 per cent by Friday from a life high of 15,868.85 points on July 24. Fund managers expect mutual fund corpuses to be significantly lower in August as compared to July end numbers.

With the market seeing bouts of stomach-churning volatility, there is a general perception that equity as an asset class could become less attractive to investors.

"Looking ahead, people would be cautious in taking exposure to equity or equity-related schemes in the current market," said Soumendra Nath Lahiri, senior vice-president and fund manager, DSP Merrill Lynch.

However, mutual funds can take some comfort from the fact that Indian investors do not radically change from equity to debt, say fund watchers.

Several equity funds are in the offing including some that are offshore funds, as per the filings with the Securities and Exchange Board of India (Sebi).

Fund watchers feel that it will not be as easy for these funds to raise money in the current market. "Equity funds were lucky not to get redemption requests. However, the NFOs that will come now, will find it hard to raise money in the current market as compared to the bull market of a few months back," said Dhirendra Kumar, CEO of Value Research, which tracks the mutual fund industry.