Yields unfixed, debt mutual funds lose appeal

Mumbai: Low and unpredictable returns from debt mutual funds over the past year and concerns of mark-to-market losses on these plans in case of a pronounced reversal in the rate trajectory have led investors to alternatives.

Wealth managers point out that this money is going to a mix of products like fixed deposits, peer-to-peer lending, covered issuances and balanced advantage funds.

Data from industry body AMFI showed that the number of folios in debt funds shrank to 7.45 million from 8.25 million a year ago. Assets of debt funds moved up from ₹13.88 lakh crore to ₹14.59 lakh crore in the same period. Data from Value Research showed that returns from liquid funds have slipped to 3.29%, while banking and PSU funds have returned 4.24% and long tenure gilt funds have returned 3.27%. Hence, several investors are looking for substitutes.
Investors who want to keep it simple and want predictable returns are moving to AAA-rated corporate deposits, where yields are up to 7%. "There is the predictability of returns in corporate deposits, which helps investors who keep these deposits to meet goals of education for their kids. All the companies recommended are AAA-rated with a long-standing past track record," said Anup Bhaiya, CEO, Money Honey Financial Services.

Companies such as HDFC, Bajaj Finance and ICICI Home Finance are attracting investor interest.

Some investors with an appetite for taking credit risk are weighing alternatives.

"Low yields and lack of innovation in debt mutual funds are driving investors to alternative options like peer-to-peer lending and covered issuances," said Kavitha Menon, founder, Probitus Wealth. For example, NBFC Oxyzo recently offered investors a yield of 9.5% for tenures of 24 months, while peer-to-peer lending platforms could give upward of 12% a year, although they come with their share of risk.

Some rich investors looking at better tax incentives and with an appetite for risk are shifting out from debt funds to balanced advantage funds.

"A rate hike will bring down returns for debt fund investors. Hence investors with some risk appetite and a horizon of two to three years can use balanced advantage funds," said Chetan Nandani, founder, Prime Care Investments.

Nandani expects balanced advantage funds to yield 8-9% returns over three years and recommends Tata Balanced Advantage Fund and Kotak Balanced Advantage Fund.

These funds vary allocation between debt and equity, based on market valuations, and are less volatile than pure equity funds. They are classified as equity funds for taxation.