Mutual Fund houses turn to debt schemes as interest rates rise
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MFs turn to debt schemes on rate hikes

Standard & Poor's (S&P) downgrade of US credit rating added to the debt worries of euro zone countries, casting a shadow on the global economic growth prospects in the near term.

  • Mumbai,  August 18, 2011  
  • |  
  • UPDATED   14:16 IST

Redemption pressures are mounting on equity mutual fund (MF) schemes in the wake of rising volatility in the equity market, though they have not reached alarming proportions yet. Besides, many fund houses are witnessing shift of money from equity schemes to debt schemes in line with the rising interest rate scenario.

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"Equity scheme redemptions are on the rise since the US downgrade. But they are not comparable to the proportions seen in the past when the equity market was in a bear hug," said a senior mutual fund official, who wished not to be identified.

Standard & Poor's (S&P) downgrade of US credit rating added to the debt worries of euro zone countries, casting a shadow on the global economic growth prospects in the near term. In its wake, equity markets across the world suffered from lack of confidence.

Srinivas Jain, senior vice-president and chief marketing officer of SBI Mutual Fund, said: "Redemption is part of our business. Though we are not losing equity folios, the funds inflow is not on expected lines. Inflows are not equal to what they used to be."

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The bellwether BSE Sensex has shed 3,668 points or 17.9 per cent in 2011, so far. And the markets saw the highest volatility of 37 points in a session last week.

Rakesh Goyal, senior vice-president in charge of mutual funds of Bonanza Portfolio, said that the redemptions are not severe as of now. "There are not many lumpsum investments in mutual funds since 2008. Most of the investors are retail, that too through systematic investment plans (SIPs), most of whom are long term investors. That is why the redemption pressure is minimal."

Only long term investors understand the importance of staying put in the markets in times of negative sentiment. Short-term investors lose faith in such a market and may not return to the market for a long time.

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Usually, investors withdraw their investments for liquidity and to seek alternative investment options.

Responding to a query, Jain of SBI MF said, "Investors are seen shifting more towards fixed maturity (debt) plans (FMPs) and gold exchange traded funds (ETFs), from equities. There are distribution and product innovation issues and there is no big offering in the market now. It has also got to do with investor expectations and fund performance."

The trend had begun in July itself, when equities schemes (equity and ELSS funds) shed 1.17 per cent in assets under management (AUM) and debt funds (mainly income and liquid/ money market funds) gained 12.58 per cent.

The top 12 index and tax saving schemes listed by SMC Global Securities for the week ended August 12 have been bleeding in the one-three months period, while the 12 diversified funds have been bleeding in the last one month.

SBI MF is planning to launch a gold fund of funds next week to take advantage of rising interest in gold-related products. "Gold ETFs are doing well with the rise in gold prices. But they have their own problems like lack of counselling. So, we are coming up with a gold fund of funds, with a target to raise funds that are double that of our gold ETF," Jain added.

For the quarter ended June 2011, SBI Gold ETF had an average AUM of Rs 21,830 crore.

ETFs are direct buying products available in dematerialised (demat) format. Thus, the investor should have full knowledge about the product and price movements to enter gold ETFs.

Courtesy: Mail Today