Trend remains dull in the debt mart

The debt market has remained lacklustre in the last couple of months, with debt fund managers advising investors to avoid expectations of double-digit returns.

Investors have got used to the double-digit returns idea in the last couple of years but with both government security prices and call money rates remaining range-bound, fund managers said investors should tone down their return expectations for 2004 too.

In the near to medium term the debt market is expected to be volatile as the probability of spreads between corporate bonds and government securities squeezing further will be high.

If the expected industrial recovery actually materialises, the real rate of return on Indian bonds would turn negative as global commodity price rise would lead to higher manufacturing inflation.

However, there is another school of thought that is gaining currency in the debt mart.

Some fund managers argue that even debt investments can give superior and consistent returns in a volatile and uncertain market, provided it is specially designed and sold to investors keeping in mind the need of the hour One such product, which they feel should appeal mostly to investors who are parking their money in liquid funds in the absence of a suitable investment alternative, is the floating rate fund.

This category of funds would be the perfect choice for investors who are conservative and do not want to move away from the objective of investing in bond funds.

A floating rate fund is a pure debt fund in which the fund manager primarily invests in securities that carry a floating rate of interest.

As interest rates change, coupons of floating rate funds also change, enabling the investor to earn as close to market rates as possible.