Mutual funds bullish on fixed-income securities

Despite the volatility in debt markets, mutual funds seem to be pouring more money into fixed-income securities. These funds have pumped Rs 20,700 crore since the beginning of the financial year till August 10 this year, surpassing their net purchases during 2004-05.

In the last financial year, net debt investments by mutual funds stood at Rs 16,987 crore against Rs 17,151 crore till end-July 2005. Fund managers said today the huge inflows into the floating rate and short-term funds boosted mutual fund investments in debt markets.

Besides, after the recent credit policy, several fund managers, who were sitting on cash, have also increased their exposure to debt instruments.

Binay Chandgothia, deputy chief investment officer of Principal PNB Asset Management said, "From the supply side point of view, floating rate funds and short-term funds have received good response from investors this financial year. This is one of the reasons for the spurt in debt investments by mutual funds."

For the record, the assets under management (AUM) of short-term debt funds have gone up by Rs 3,251 crore during the last four months, while the floating rate long-term and short-term funds have surged by Rs 934 crore and Rs 4148 crore, respectively, during the same period. Income funds, which had performed miserably in the past year owning to rising yields, have also seen Rs 397 crore of inflows.

"This rise in debt purchases is a reflection of inflows into debt funds," said Tridib Pathak, chief investment officer of Cholamandalam AMC. The higher inflow into short-term debt products is explained by two factors.

One, low bank deposit rates are compelling investors to look at liquid funds more seriously as they offer reasonably stable returns with better tax-efficiency.

Two, equity investors are ploughing the profits booked in stocks into liquid funds.

Rajan Mehta of Benchmark said, "Since the 6.5 per cent RBI Relief Bonds are no longer available, high networth individuals are parking their surplus funds in floating rate schemes. Also, with the Sensex rising sharply in the recent months, cautious equity investors are also shifting their investments to the liquid and floating rate schemes." Short-term debt funds and floaters give returns in the range of 4.5-5 per cent.

They also offer better tax-efficiency as dividends are subject to a distribution tax of 14.5 per cent while short-term fixed deposits are charged at the personal income tax rate.

For long-term savers, too, debt funds work out better as they are subject to a flat 10 per cent tax or 20 per cent after accounting for indexation. This is again better if one falls under the highest income tax bracket.