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Debt Funds-An Ideal Investment Among Fixed Income Products
By : Nimesh Shah
(The author is the MD and CEO of ICICI Prudential AMC)



The growth of mutual fund industry in India has been fuelled by equity and debt oriented schemes. These are the only two asset classes where a wide variety of products have been made available. The other asset classes are yet to play their part. Unlike equity products which thrive on the notion of long term, higher risk and commensurate returns; debt mutual fund product appeal to investors based on considerations such as safety, liquidity and reduced volatility of returns.

However, even after several years of introduction and innovation, investing in fixed income mutual fund products largely remains a bastion of institutional investors in India. Retail investor participation in this asset class through mutual funds is negligible given its potential. This is counter intuitive considering the vast amount of savings that the Indian investors have in bank fixed deposits. If one looks at the asset allocation pattern of Indian retail investors, it is evident that Indians are predominantly fixed income investors by nature and convention. This variance is clearly an opportunity for the mutual fund industry.

In terms of diversity of product offerings, the debt mutual fund offer products with different permutations of liquidity/tenors, credit quality and interest rate related volatility to address various investment requirements based on an investor's investment objective, risk appetite, and time horizon. The industry needs to invest in increasing the awareness among the retail investors so that they can take advantage of a wide array of relevant and beneficial products. The product offerings in debt space today are multi-fold and designed for retail as well as institutional investors. Right from avenues such as Gilt funds which typically provide returns in the form of capital appreciation and interest income by investing in to government securities of varying maturities, we have various short-term investment avenues such as Fixed Maturity Plans (FMPs) designed to lock in yields by buying and holding papers of similar maturity, Interval funds, short-term and ultra short-term funds which are more accrual based meant for short-term deployment of funds. At the same time, we have category of funds which seek to provide regular income through dividends in the form of Monthly Income Plans.

While mutual fund as an investment category cannot guarantee returns, the other aspects of investor's reservation can be dealt by creating awareness towards debt as an avenue towards safety, liquidity and returns. In this reference, I would like to draw reader's attention to the second half of 2008 which has been known more for the collapse of the global financial system. If one were to look at the returns generated by some of the debt mutual funds during this period, one would certainly be caught off guard. The point that I am attempting to make here is that at various points of time different asset classes have outperformed and with the ever changing investment environment each asset class will have some uniqueness to offer in an investor's portfolio.

To sum it up, each asset class has its pros and cons and its fitment would be a function of the prevailing market environment as well as investor's specific situation. It is imperative to increase awareness among retail investors on merits of considering debt as an investment proposition. I strongly believe that the onus lies on us and the entire investment fraternity to educate investors on the same.
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