VR Logo

Debt Fund Innovations

The Equity markets have always won the coveted title of long term wealth creators. Amidst this, the debt funds, through new innovative offerings, have become largest fund mobilisers.

Equity funds, for their action get all the attention. With returns a scorcher, the equity category draws instant reactions. On the other hand, debt funds are sedate performers. Since they offer little excitement, the innovation sweeping the debt fund family also goes largely unnoticed. Yet, in just about six years, we have a vibrant open-end debt fund segment that commands a total asset base of Rs 22,700 crore. The category has also beaten the flashy open-end equity funds hollow, which currently manage only 8700 crore.

Debt Fund - Innovation Milestones

December 1994 - Swarmed by closed-end funds from public sector AMCs, JM Mutual launches first open-end medium-term bond fund.

June 1997 - Hamstrung by the 30-day lock-in in money market mutual funds, Birla Mutual Fund AMC launches first quasi-MMMF, Birla Cash Plus. The cash fund veers around the lock-in while investing in the same basket of securities.

December 1998 - Kotak Mahindra launches K Gilt, the first fund with dedicated investments in government securities.

July 1999 - Alliance Mutual Fund launches first open-end MIP amidst a flurry of UTI's closed-end and assured return MIPs. Armed with liquidity and market-related returns, Alliance MIP challenges the edifice of closed-end MIPs.

October 1999 - In yet another innovation, Kotak Mahindra launches serial or fixed maturity plans to minimise the impact of interest rate volatility. With a closed-end structure or hefty exit load, these funds offer implicit assured returns by matching their redemption with underlying bonds.

While the above listings highlight the evolvement of open-end debt family on the Indian firmament, it ignores another important aspect of service enhancement like holiday NAV, limited check writing, direct credit etc. But, that is a different story. Armed with tax breaks and high service standards, the debt fund juggernaut has now gathered momentum. With the category increasingly finding favour with investors, Standard Chartered AMC now envisions to be a dedicated debt fund house with no immediate plans to launch an equity fund.

Yet, fund houses continue to be innovative, launching new products and finely slicing maturity profiles to meet the demands of investors. The latest in the row is a short-term debt fund, which fits the bill between a cash fund and a medium-term bond fund. Launched by Standard Chartered AMC, the fund is targeted at investors, who want a higher return than cash funds but have an investment horizon of 1 to 6 months. While the fund returns 50-100 basis more than a cash fund, it shields investments from interest rate volatility. Templeton AMC is also exploring the possibility of a similar product, though it is yet to firm up its plans.

Clearly, the silent family of debt funds has steadily emerged as the cornerstone of the fund industry. Further, the by and large stable returns have been matched with liquidity and other features, thus adding to the charm of bond funds. With the market on a growth path, the family is tipped to expand with more complex products.