"In equity, you are advised to stay invested for a long term while in debt funds, you can choose your time horizon" - Gautam Kaul

What is the difference between debt fund management and equity fund management?

The debt fund fragmentation is primarily based on the time duration where you have ultra short term funds, short term funds, income funds (for long duration) and the dynamic bond funds, which can go across durations. However equity fragmentation is done based on diversified, sector specific, large cap or small cap. The markets are also slightly different for the two. Like equity funds, I do believe that debt funds are also suitable for the retail investor. A liquid fund scheme is a great alternative to short term gains.

What can be done to create awareness amongst investors about the various available options in the debt category?

Most people talk about a diversified investment portfolio, which includes a little bit of debt, equity, commodities and so on. Within the debt fund space (depending on your investment horizon) if you have money only for a short term that you might need any day, keep it in a liquid fund. It will give you better returns than the saving rate and it is almost liquid, which means you can get the money within 24 hours. However if you have a portion kept aside specifically for the investment purpose, you can invest it in short term funds or an income fund depending upon your risk appetite. And that’s what I think is the basic difference. In equity, you are always advised to stay invested for a long term while in debt funds, you can pick and choose your time horizon.

What about the return parameters?

Obviously in the long term, equity gives you better returns. However the best part about debts funds is that you get a regular interest income. Besides you get capital gains on a regular interval. So, at any given point there is certain stream of income.

And how does the fund manager ensures this?

See, any fixed income instrument you invest in guarantees regular interest. Besides there is an accrual happening on a daily basis. That happens for all types of funds whether income fund, liquid fund or a short term fund. Now for example the liquid fund kind of portfolio where there is no mark-to-market, you only have your interest stream coming in while in an income fund or a short term fund where there is a mark to market also, there is a daily discount which happens and depending upon whether the markets have gone up or down, there is slight capital appreciation or depreciation happening. So, that is how you pick and choose debt funds.

So, would you agree that the debt fund management is more of a standardized way of doing investment rather than the dynamism, which is involved with equity markets?

Here at IDBI, we put a lot of focus on the macro view. What is the long term view, interest rates and all! Within this gambit, you have lots of options unlike equity markets where you have some 500 stocks to pick from. In debt markets, you have new securities being launched everyday and people have the freedom whether to invest for a week or a month or a year or five years.

Interest rates have been ruling the markets for some time now. What is your take on the same?

What India requires for long term economic growth is a steady and low interest rate scenario. That would happen only when you have low stable inflation figures. In the last two years, inflation has rallied up and RBI had to pitch in to curb the menacing inflation figures. Now since the inflation figures are coming down, our sense is that interest rates are peaking too. That does not mean interest rates among all segments would come down simultaneously but as far as the benchmark rates are concerned, they have more or less peaked. So, we could see a cut from RBI’s side. We expect the benchmark rates to gradually come down. That will have an impact more on the short term interest rates than the long term rates.[PAGE BREAK]

So, what is the ideal situation for a fund manager? Rising interest rates or declining rates?

With the introduction of the interest rates coupon, interest that you get on your security keeps increasing. So, your income from that part increases while your income from capital gains may decrease. On the other hand when rates are coming down, your interest cash flow portion might come down while your mark-to-market gains increase.

So if we go by this theory, I can assert that coupon rates are going to go down since interest rates are expected to come down. Isn’t it a catchy situation for the investor?

I think now is a great time for an investors to invest in the debt market. Right now coupon rates are high, so even if the markets do not go anywhere, you are at least guaranteed that high coupon. Going forward, coupon rates might come down (that is for the incremental investment). One year down the line I feel the benchmark rates would be lower, general market rates will also be lower. So, currently we suggest a short term kind of scheme maturing in the next two to three years rather than a long term scheme of say 10 years.

Is the buoyant equity market bad for the debt market in terms of assets under management?

See there is a perception that assets move very fast between equity and debt markets depending upon where the market is going though honestly speaking, I have not seen that happening in the retail side. As more and more people opt for investment portfolios, some part of assets are being kept in debt market as well.

Can you tell me the kind of investment procedure a typical fund manager follows?

As far as we are concerned, the idea is to begin with the macro picture and look at all the factors including inflation, rate cycles, commodity prices and so on. That defines our broad interest area. Within that, depending upon the mandate of the fund, we manage it.

How would you rate the Indian bond markets? Can retail investors consider it as a genuine option?

There is enough depth in certain segments though there is no broad depth in the overall bond market. There is enough depth in corporate bonds though I’ll not invite retail people to invest in the bond markets independently. If you directly want to access the market then it is a bit tricky situation. If you have the time and information then you can go ahead directly. But if you don’t have any of these then mutual fund is probably the best way possible.

Most of the debt fund strategy depends on the ratings done by credit agencies?

Ratings provide you a broad framework and tell you only a relative financial health. Beyond that for all other factors, we do our internal research where we might not agree with the rating agency. Factors such as what price to buy a corporate is not defined by the rating agency.

Are debt funds a better option for creating a corpus in the long term rather than equity funds?

The uncertainty involved in the equity fund is higher, so you have higher returns as well. Finding a balance between the two is the key here. If you invest only in a debt fund, you will get stable returns but not the kind of appreciation that equity funds can provide and vice versa. India is bound to grow further as there is the great potential in the country. Even if things improve marginally, the growth would be there. So, people should not discard either option and park their funds wisely.