Fund houses eye debt-focused investment products to gain traction

With bond yields hardening and equity market returns narrowing, fund houses are pinning their hopes on debt-focused investment products to gain traction. While most of them have started pushing for fixed-income products, some are launching new fund offers (NFOs) to fill the product lacunae.

Edelweiss AMC, for instance, is set to launch a ‘dynamic bond’ fund soon. “Fixed-income products such as dynamic bond funds have disappointed investors, especially at the long end of the yield curve. There has been lot of volatility without decent returns. We plan to launch a more process-oriented fund in the dynamic bond category that can give better returns in short term, without too much downside,” says Radhika Gupta, CEO at Edelweiss AMC.

Dynamic bond funds operate with an income accrual-based strategy and also try to generate capital gains through duration calls in government securities (g-sec) and trading corporate paper.

Since April, the yield on AAA-rated corporate bonds has increased from 7.7 per cent to 8.6 per cent, amid g-sec yields touching the 8 per cent mark.

“This would be a good time to invest in income-accrual funds as yields are moving up and the spread on ‘AAA’ and 'AA'-rated bonds is at an attractive level. In a rising interest rate scenario, you get a higher coupon rate,” says Vidya Bala, head of mutual fund research, FundsIndia.

“We are currently evaluating the possibility of launching an accrual-based fund on the credit side,” says Ashutosh Bishnoi, MD and CEO at Mahindra AMC.

Industry observers suggest that with g-sec yields hovering at 8 per cent, shorter-duration corporate paper could offer attractive returns.

Industry experts also suggest that the plain vanilla income-accrual funds could also find a few takers in the current environment.

“We continue to favour corporate credit-accrual funds over duration and prefer short-end over long on a risk-reward basis,” says Sanctum Wealth Management.

“We have been advising clients to de-risk their portfolios and opt for short- to medium-term AAA-oriented accrual-based funds,” adds Suyash Choudhary, head, fixed income at IDFC AMC.

Industry players say fixed-maturity plans (FMPs) are attracting a lot of interest from investors.

“Particularly after March, rates at the short end of the curve tend to fall. However, this time the rates have gone up instead. With a lot of volatility in the macro-environment, investors want to lock in their investment at higher interest rates. Since March, our FMP launches have picked up pace,” Choudhary adds.

In contrast to accrual-based funds and dynamic-bond funds, FMPs are close-ended ones. Indexation benefits are only available if the investment is held for more than three years.

“Despite the need to stay put for longer periods in FMPs, investors don’t mind as the opportunity to lock-in assured yield in this uncertain environment is not such a bad idea. We have also launched a few FMPs recently,” says Mahendra Jajoo, head- fixed income at Mirae Asset Global Investments (India).

NS Venktatesh, CEO of the Association of Mutual Funds in India (AMFI), suggests there might be investors who had already booked profits in FMPs as some of them had matured, and were waiting for an opportunity to re-enter the category as yields inched up.

Already in the first quarter of FY19, the industry has seen 102 NFOs in the FMP category — the highest ever seen in the first quarter over previous three fiscal years, according to the data from Value Research.

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