Saturday 16 March 2013

My Understanding Of Debt Funds !!!




Macro View
This week was a loaded one with a lot of crucial figures hitting the headlines. The WPI figure rose to 6.84% versus the January figure of 6.62%. This followed by the IIP and CPI which came in at 2.4% and 10.9% respectively. Although the IIP figures seemed to be better than expected, the Inflation figures were bit disappointing. The GDP figure remained stagnant at 4.8%. If we re-view these figures in hind sight, headline inflation has dropped from a peak of 10% in September 2011 which seems appealing. However the growth figures have dropped drastically from 9% in Q1FY11.  With the re-view of monetary policy on the 19th of this month, RBI is in a pressure situation with context to cutting interest rates. Despite WPI figures spiking as on today, the good news is that the core inflation as an indicator of demand side pressures on prices - fell below the 4.0 per cent mark for the first time in past 35 months, strengthening the case for a repo rate cut by the RBI on March 19, 2013. 

Why is rate cut imperative?
GDP has been on a decline for a pretty long time and the further it deteriorates; the tougher it is to pull it back to the growth phase. One of the impediments to growth is a higher interest rate. But with Inflation ruling high, RBI was not able to lower the rates without it impacting the economy in other ways. But with core inflation finally cooling off and government promising to spend less, which in turn shall mean a lower pressure on funds, a rate cut via Repo maybe on the cards when RBI meets at its policy meet on 19th March 2013.

Impact on Debt Funds
Macro economic factors impact interest rates which in turn affect bond yields and bond prices. The announcement of a higher WPI number, yield rates went up, but dropped 5 bps as core inflation moderated. So based on all the above parameters, I anticipate interest rate (repo) to be cut and as a result, bond prices will go up to adjust for the lower interest rate scenario that shall get played out.
At this juncture, the question we should ask is, if the interest rates in India are turning around, what fund in the debt segment should one invest?
The answer to this ultimately depends on the horizon of the investor. The short term debt fund is good for a tenure that is less than a year. The factors that become more pertinent are the liquidity situation and thus a CRR rate cut would imply better returns on a short term fund. However, for an investor who is comfortable locking in funds for a long term, this is a good time to invest in long term bonds funds to ensure that he locks up his funds at the current yields which are reasonably higher than what can be got in the future when RBI starts to cut interest rates to stimulate the economy.

Where to Invest?
With a plethora of funds available in the Mutual Funds – Debt segment, it is important to pick the appropriate fund. After evaluating the macro scenario and the debt investment duration, the fund evaluation is the last step to the process. The long term debt fund involves Income Funds, Gilt Funds and Dynamic Bond Funds.

The top 3 picks are:-
·         IDFC SSI Invest A (G):- This fund was launched way back in June ‘2000 and is managed by Mr. Suyash Choudhary. The fund has managed to sustain itself in the top quartile of funds, year on year which exhibits consistency in performance. It has delivered a return of 12.37% in the last one year and a return of 8.57% since the launch. The average credit rating has been AAA. The number of holdings is 17 with an average maturity being 2 years.

·         UTI Bond Fund: - Another good income fund which occasionally is unpleasant, but mostly it’s about pleasant surprises. It found itself amongst the top five twice; once in 2005 and the other instance in 2011. In recent times, the fund is seen to more actively manage its maturity bets. It is fairly consistent in its performance which does not deviate too far from the category average and has a long term track record to back it up. The fund maintains a high quality portfolio with majority of the investments into debentures and government securities.

·         Morgan Stanley Active Bond Fund: - With an inception as late as 2009, the fund has picked momentum and is one of the best performing funds. It had its share of initial glitches; however we anticipate a good show in the times to come. It is a fund for investors with lower risk appetite with a portfolio of just 10 securities and an average maturity of 3.18 years. The quality of security is good and well maneuvered by Mr Ritesh Jain.


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