Bonds rated below AAA may be wise bets
Such bonds may be wise bets for not only mutual funds but also insurance, pension and provident funds. Besides, there is always the carrot of better returns.
By Gaurav Pai, TNN |
MUMBAI: They say cracking the IIT entrance exam or qualifying for IIMs is one of the toughest tasks in the country. But if you ask an Indian debt fund manager, who is likely to be an IIT engineer-turned IIM passout, he may well say that nothing gets more challenging than getting your debt fund to perform better than others.
Over the past few years, the booming stock market and unforeseen profitability for Indian companies have meant that high net-worth individuals, treasuries of corporates and banks have made large surpluses. Thanks to the tax arbitrage available, they have been investing heavily into liquid and fixed maturity plans of mutual funds. Money chases performance, just that here it runs to tens of thousands of crores.
In spite of a crazy race for few extra basis points, fund houses appear to have become slightly too conservative, even lazy in selection of investment avenues. Experts feel that it is high time that fund houses give up their fascination with AAA paper, and in the better interests of the economy (and themselves really) look at other means to spruce up their returns. Investing in slightly lower-rated paper for instance.
Krishnan Sitaraman, head of fund services and fixed income research at CRISIL, points out that while the policymakers look to develop the junk bond market (Sebi recently allowed firms to issue BB and below bonds), the demand for the paper below AAA (like AA, A and BBB) remains dismal.
“Mutual funds in the country can take a lead in this direction,” he says. “If this market is strengthened, more entities like lower-rated companies - say banks - should be able to tap the market. This, in turn, could lead to better channelling of resources,” he adds. Mr Sitaraman’s cajoling MFs to invest in slightly riskier paper should also be seen in the context that as of now pension and provident funds are absolutely unwilling to even look at below AAA paper. The risk involved is too much considering that they are handling monies of millions of middle class Indians.
Among the existing players, Deutsche AMC has been the most innovative fund house in this space. It was the first Indian fund to launch a scheme that exclusively invests in ‘AA’ paper and investors seem to have lapped on to the idea.
The corpus of DWS Money Plus - a liquid-plus scheme - has grown from a modest Rs 60 crore (at its inception one year back) to over Rs 4,200 crore this November. Not a real surprise when you consider that the scheme has been outperforming its benchmark (Crisil Liquid Index) by a really long mile.
Suresh Soni, chief investment officer at Deutsche AMC, says that, at times, it pays to take a calculated credit risk in your portfolio to earn that little extra in returns. “We are at such a stage in the economic cycle that most companies are doing well and debt servicing (payment of interest) will remain steady,” he feels. Buoyed by the success of its first AA fund, Deutsche launched a DWS Credit Opportunities Fund (another Liquid-Plus scheme) in the middle of 2007, which now figures in the top five funds in the category, asset-wise.
What Mr Soni and Mr Sitaram are suggesting is that in spite of being slightly riskier investments, bonds-rated just below AAA may be wise bets as the chances of them defaulting are not really that high. Besides, there is always the carrot of better returns. And just in case the MF industry jointly manages to breathe some life into this moribund segment, then other players may also join the party, leading to more liquidity in the market.
Over the past few years, the booming stock market and unforeseen profitability for Indian companies have meant that high net-worth individuals, treasuries of corporates and banks have made large surpluses. Thanks to the tax arbitrage available, they have been investing heavily into liquid and fixed maturity plans of mutual funds. Money chases performance, just that here it runs to tens of thousands of crores.
In spite of a crazy race for few extra basis points, fund houses appear to have become slightly too conservative, even lazy in selection of investment avenues. Experts feel that it is high time that fund houses give up their fascination with AAA paper, and in the better interests of the economy (and themselves really) look at other means to spruce up their returns. Investing in slightly lower-rated paper for instance.
Krishnan Sitaraman, head of fund services and fixed income research at CRISIL, points out that while the policymakers look to develop the junk bond market (Sebi recently allowed firms to issue BB and below bonds), the demand for the paper below AAA (like AA, A and BBB) remains dismal.
“Mutual funds in the country can take a lead in this direction,” he says. “If this market is strengthened, more entities like lower-rated companies - say banks - should be able to tap the market. This, in turn, could lead to better channelling of resources,” he adds. Mr Sitaraman’s cajoling MFs to invest in slightly riskier paper should also be seen in the context that as of now pension and provident funds are absolutely unwilling to even look at below AAA paper. The risk involved is too much considering that they are handling monies of millions of middle class Indians.
Among the existing players, Deutsche AMC has been the most innovative fund house in this space. It was the first Indian fund to launch a scheme that exclusively invests in ‘AA’ paper and investors seem to have lapped on to the idea.
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The corpus of DWS Money Plus - a liquid-plus scheme - has grown from a modest Rs 60 crore (at its inception one year back) to over Rs 4,200 crore this November. Not a real surprise when you consider that the scheme has been outperforming its benchmark (Crisil Liquid Index) by a really long mile.
Suresh Soni, chief investment officer at Deutsche AMC, says that, at times, it pays to take a calculated credit risk in your portfolio to earn that little extra in returns. “We are at such a stage in the economic cycle that most companies are doing well and debt servicing (payment of interest) will remain steady,” he feels. Buoyed by the success of its first AA fund, Deutsche launched a DWS Credit Opportunities Fund (another Liquid-Plus scheme) in the middle of 2007, which now figures in the top five funds in the category, asset-wise.
What Mr Soni and Mr Sitaram are suggesting is that in spite of being slightly riskier investments, bonds-rated just below AAA may be wise bets as the chances of them defaulting are not really that high. Besides, there is always the carrot of better returns. And just in case the MF industry jointly manages to breathe some life into this moribund segment, then other players may also join the party, leading to more liquidity in the market.
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