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In Times of Declining Returns

Having realised the importance of lower expenses, fund houses have launched institutional debt funds with lower expenses and high minimum investment.

Some years ago, if you went hunting for variety among debt funds, all you would find is a plain-vanilla bond fund (launched in 1995), a cash fund (1997), a gilt fund (1998), a short-term debt fund (2000), or a high-yield debt fund (2002). A new innovation now has been the launch of institutional plans for income, short-term and cash funds. An institutional plan is essentially an income fund, which is targeted exclusively at large investors and offers lower expenses. While the portfolio will be similar to the parent fund, the NAV and returns will vary. The reason: relatively lower expenses of institutional plans.

In 2002, the first fund house to launch an institutional income plan was Franklin Templeton Investments. ''By nature, an institutional investor is cost-sensitive, and has different investment expectations. Hence, there was demand for a product that catered to their unique needs,'' says Ravi Mehrotra, president, Franklin Templeton. Recently, as many as 11 income funds have introduced institutional plans. To prevent inflows or outflows of institutional investors from affecting retail investors, Templeton Income Builder-Institutional Plan maintains a separate portfolio. In fact, some short-term debt and cash funds have also joined the race to differentiate between institutional and ret-ail investors. But then cash funds largely attract big-ticket investors. So, why launch a separate fund?

Volatile bond markets in the first quarter of 2003 have left income fund investors high and dry. Thus, wary investors preferred to park funds in a cash fund, which carries a negligible interest rate risk. Big investors by virtue of the size of investment have forced cash funds to reduce their expenses. The minimum investment in institutional plans has been pegged at between Rs 1 crore and Rs 5 crore. While institutional cash funds charge 0.60-0.75 per cent less, short-term debt funds charge 0.20-0.35 per cent less than their respective non-institutional offerings.

Some fund houses like HDFC Mutual have gone a step further by categorizing investors in the Rs 5-crore and Rs 20-crore investment slab, thus offering two additional plans to them. Franklin Templeton has restricted institutional plans to income funds, as it believes that expenses in its short-term debt and cash funds are already low. The fund industry it appears has realised the benefits of low expenses—even though the impact will be felt only in stable market conditions.