MFs buy securitised debt to step up returns
Fund managers of debt schemes are going all out to ensure that they are able to get that extra bit of returns for their unit holders. Investing tips for beginners
By Gaurav Pai, TNN |
MUMBAI: Fund managers of debt schemes are going all out to ensure that they are able to get that extra bit of returns for their unit holders. Leading debt fund managers are increasingly adding securitised debt instruments to their portfolios.
And although the market for such paper is still not very developed in India, fund managers say that over the past few months, various fixed maturity plans and liquid plans have been gradually increasing their exposure to such structured products.
Securitised debt is a process by which loans to companies or individuals or mortgages are broken down into smaller pieces by banks and then sold to investors like mutual funds, pension funds, banks and insurance companies. Since these pools of debt are riskier and illiquid, they offer more yields than other papers of similar duration, making them an essential part of a fund's portfolio.
ING Investment Management India's Ramanathan K (head-fixed income) estimates that his fund house's investments in single loan securities (loans given to companies sold as paper) has more than doubled in the past six to eight months. He says that this has been the trend at most Indian fund houses, and paper from auto, personal and credit card loans are the other areas where fund houses are investing.
Corporates, banks and other large institutions invest their surplus cash with liquid, liquid plus and short-term income funds of various fund houses. However, the competition in this segment is cut-throat as a difference of a few basis points in returns can mean a few hundred crores gained, or lost, for asset m a n a g e m e n t companies.
Crisil's D Thyagarajan (director of structured finance ratings) says that the growth in the segment is due to the buoyancy both in the demand and supply of such paper. "Securitised instruments are an attractive proposition for funds because of higher yield of 50-100 basis points against paper of similar rating. Also the monthly cash flow schedule (wherein liquid funds or FMPs get a part of the principal and interest of loans) suits the needs of debt mutual funds," he explains.
As for banks, it allows them to lend further as the existing loans are now off the balance sheets besides helping them book some profits. Since the interest rates in the country are still not falling, the size of long-term income funds is still small. This means that the scope for MFs to hold paper cut from mortgages (usually of a longer duration) is minimum.
And although the market for such paper is still not very developed in India, fund managers say that over the past few months, various fixed maturity plans and liquid plans have been gradually increasing their exposure to such structured products.
Securitised debt is a process by which loans to companies or individuals or mortgages are broken down into smaller pieces by banks and then sold to investors like mutual funds, pension funds, banks and insurance companies. Since these pools of debt are riskier and illiquid, they offer more yields than other papers of similar duration, making them an essential part of a fund's portfolio.
ING Investment Management India's Ramanathan K (head-fixed income) estimates that his fund house's investments in single loan securities (loans given to companies sold as paper) has more than doubled in the past six to eight months. He says that this has been the trend at most Indian fund houses, and paper from auto, personal and credit card loans are the other areas where fund houses are investing.
Corporates, banks and other large institutions invest their surplus cash with liquid, liquid plus and short-term income funds of various fund houses. However, the competition in this segment is cut-throat as a difference of a few basis points in returns can mean a few hundred crores gained, or lost, for asset m a n a g e m e n t companies.
Crisil's D Thyagarajan (director of structured finance ratings) says that the growth in the segment is due to the buoyancy both in the demand and supply of such paper. "Securitised instruments are an attractive proposition for funds because of higher yield of 50-100 basis points against paper of similar rating. Also the monthly cash flow schedule (wherein liquid funds or FMPs get a part of the principal and interest of loans) suits the needs of debt mutual funds," he explains.
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As for banks, it allows them to lend further as the existing loans are now off the balance sheets besides helping them book some profits. Since the interest rates in the country are still not falling, the size of long-term income funds is still small. This means that the scope for MFs to hold paper cut from mortgages (usually of a longer duration) is minimum.
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