The highlight of the last quarter was the higher mobilisation by debt funds

By  BT-mutualfundsindia.com study

In a quarter when the Sensex oscillated between a low of 3436.75 and a high of 4462.11, it shouldn't require a genius to figure out why debt funds did better than equity funds. So if the last quarter (January to March) of 2000-01 was a great time to be an investor in debt mutual funds, there were good reasons for that. To begin with, on January 4, the US Fed chief Alan Greenspan reduced interest rates in the US. The Indian bond market rallied, in expectation of a similar cut and debt funds staged a comeback after an indifferent previous quarter.

An interest rate cut reduces the market yield and, hence, increases the demand for long-term debt papers bearing high coupon rates. Moreover, a benign interest rate scenario is good for existing portfolios, as the mark-to-market effect improves the return immediately and corrects the NAVs of debt funds upwards. The average annualised return for the quarter in debt funds was 14.64 per cent, which was much higher than the returns posted by any other debt-based investment instrument on a post-tax basis. The industry also saw a slew of new launches. While some of the newly-launched funds are equity funds-launched to attract investors who would like to take advantage of the low prices in the stockmarket-the majority of them were debt funds.

Further, much of the proposals of Budget:2001-aimed at the capital market-benefitted investors in debt rather than equity (a lower dividend distribution tax). The 150 basis point cut on small savings, while hurting small investors, will benefit investors of debt mutual funds because of mark-to-market effect. Says Naval Bir, CEO, ANZ-Grindlays Mutual Fund: ''Apart from servicing standards and transparency of operations, debt funds have been providing better returns and tax benefits too.''

Not surprisingly, with investors preferring debt to equity, the highlight of the quarter was higher mobilisation by different categories of debt funds. The assets under the management of income funds alone rose by Rs. 2,500 crore, between December 31, 2000 and February 28, 2001. The assets under the management of gilt funds increased by 25 per cent in the same period. The assets under balanced funds increased by Rs 600 crore during the last quarter. "The equity fund sales have come down and we are trying our best to improve equity fund's proportion in the total kitty. It is ironical that investors hesitate in investing when the markets fall and try to look for bottom, which nobody can predict,'' says Nikhil Johri, CEO, Alliance Mutual Fund.

And investors weren't disappointed. Each one of the debt fund schemes posted positive returns. Debt offerings from Kothari Pioneer performed very well, with KP Children's Asset Plan generating a 6.20 per cent absolute return for the quarter. The fund seems to have benefitted from the recent cuts in interest rates, generating returns of almost 14 per cent in the last one year. The fund manages a portfolio spread across good debt securities, 87 per cent of which have been rated AAA or above. At second position, was PNB Debt Fund, which posted 4.87 per cent in this quarter alone, conforming again the fact that banks can manage debt funds well. Says Krishnamurthy Vijayan, CEO, JM Mutual Fund, "A large portion of the money received by mutual funds, has come to debt schemes because the stockmarkets have been depressed. Our corpus has gone up to Rs 430 crore."

Surprisingly, balanced funds-which invest in a mix of both equity and debt and try to use one to hedge against the other-did not record sharp drops in returns, largely because some of them reduced their exposure to equity while others had invested in less volatile old economy stocks. Nevertheless, all the balanced fund witnessed a drop in their returns.

JM Balanced, the top performer of the quarter, managed to lose little by increasing its exposure to debt and cutting its exposure to equity. Most of the equities that it holds, belong to the old economy sectors and fund lost just 1.5 per cent, enabling it to declare a dividend of 45 per cent. But investors in ING Balanced Fund weren't as fortunate. ING has big positions in infotech scrips like Infosys, Zee, Satyam, HFCL, and Wipro. No prizes for guessing why it lost heavily in the quarter under review. Despite its exposure to debt, the slide in equities overshadowed whatever gains it notched up in debt.

The great equity massacre

Cut to equity funds and you can safely turn the setting to the gloom mode. Stockmarkets have seldom had it as bad as they did in the last quarter. First, the tech bubble burst and the erstwhile darlings of the market-software stocks-plummeted. Then, after a short-lived post-budget rally, the stockmarket was caught in a bearish frenzy. Add to that a payment crisis on the Calcutta Stock Exchange and scams on Dalal Street. In short, it was a recipe for disaster, as far as equity mutual funds were concerned.

Yet, the top equity performer of the quarter (in absolute terms) was a sector fund, the UTI Growth Sector Fund-Petro. It was the only scheme to post positive returns during the last quarter among all open-end equity funds, primarily because petroleum stocks were on a high. Plus, the fund's considerable exposure (40 per cent as on February 28, 2001) to the money markets helped it offset the volatility in the equities market.

Most equity funds, however, took a battering, as NAVs plunged when the valuations of tech stocks plunged. The worst hit during the quarter was ING Growth Portfolio, which lost 45 per cent during the period. The fund had 50 per cent of its corpus exposed to Wipro and Infosys, as on February 28. In fact, the top 10 holdings of the fund were in stocks of the volatile (and worst-hit) ice sector.

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