Global sell-off: Money managers advise investors to add debt funds

Domestic investors poured 1.48 trillion rupees ($23 billion) into stock funds in the first 10 months of the financial year

Money managers in India have a simple message for retail equity investors wounded by the global selloff in the past week: add debt funds.

While the rout has sent markets from US to Asia into declines exceeding 10 percent, fund managers say there are signs that the six-month selloff in Indian government debt -- the longest run since 2000 -- may be nearing an end. The nation’s sovereign bonds Friday capped their first weekly gain in a month after the central bank kept a neutral stance in its policy review.

“There’s a case for people to get into bond funds,” Rajat Jain, chief investment officer at Mumbai-based Principal PNB Asset Management Co., said in an interview. “While there will be volatility, yields will soften from here.” He recommends shorter-maturity debt funds.

Prime Minister Narendra Modi’s government’s decision on Feb. 1 to bring back a tax on equity gains coincided with the turmoil, denting sentiment in the $2.3 trillion market that had only marched to multiple records in the past year. The rout has a silver lining: retail investors, who typically hold midcaps that are prone to pullbacks, received a stark reminder on balancing allocations between equities and debt, said Jain.

Equity investors “should book profits on the riskiest part of their portfolios and switch to less-risky assets and restore their allocation,” said Unmesh Kulkarni, Mumbai-based head of markets and advisory at Julius Baer Wealth Advisors India Pvt. Aside from short-term debt funds, he recommends “staggered” purchases of long-duration plans as the surge in local yields has gone so far that it “seem to discounting two rate increases” by the RBI.

Domestic investors poured 1.48 trillion rupees ($23 billion) into stock funds in the first 10 months of the year that began April 1, more than double from a year earlier, data from the Association of Mutual Funds in India show. The flood of cash is the reason why the S&P BSE Sensex hasn’t suffered a 10 percent correction in almost 15 months. The gauge rose 0.5 percent at 9:47 a.m. in Mumbai, as Asian stocks rebounded from their worst week since 2011.

‘More Attractive’

In comparison, flows to debt funds dwindled to 165 billion rupees from 1.65 trillion rupees, the data show, as sentiment soured on bonds amid elevated oil prices and hardening global yields. Inflows will gather pace as equity markets remain on unsteady footing and the tax on stocks damps their allure, according to SBI Funds Management Pvt.

“Retail flows to fixed-income funds will go up simply because the relative differential in returns between debt and equity will narrow” because of the tax on stocks, said Navneet Munot, who oversees about $32 billion in assets at SBI Funds. “Also, with rates likely to go up from here, debt products are going to be more attractive.”

Axis Asset Management Co., which oversees $11.4 billion, sees value in the short-end of the yield curve, said R. Sivakumar, head of fixed income in Mumbai. He recommends short- and medium-term funds, and suggests liquid and ultra-short plans for a shorter holding period.

Still, demand for debt won’t come entirely at the cost of equity inflows, Principal PNB’s Jain said. An improving global economic outlook and a recovery in Indian corporate earnings will support investor optimism, he said.

“We don’t think investors will swing entirely into debt as equities is still a good asset class to be invested in,” Jain said. “Investors must have balanced allocation. More so now.”