See double digit returns from debt funds in '13: Bajaj Cap

In an interview to CNBC-TV18, Rajiv Bajaj of Bajaj Capital, gives his expectations for debt funds in the upcoming year. Bajaj expects debt funds to give double digit returns in 2013.

Also read: Will size of fund impact its performance? On the performance of mutual funds, Bajaj says they have had 25 percent plus returns in equities and debt funds have given double digit returns. "Post tax return in debt funds have been close to 9 percent plus. Monthly investment plans (MIPs) which are blends, have given close to 13-14 percent return, "he adds. Below is the edited transcript of Bajaj’s interview to CNBC-TV18. Q: All the mutual funds seem to indicate that performance is great but participation isn’t. What are your views on this? A: Yes. This is a saying in the market that investors come in when it is time to leave and we as investors continue to prove the pundits right. Just look at the returns we have had in the fiscal year 2012, equities have given 25 percent plus returns, debt funds have given double digit returns. Post tax return in debt funds have been close to 9 percent plus. Monthly investment plans (MIPs) which are blends, have given close to 13-14 percent return. If you look at the figures, equity is negative, MIPs are negative, debt funds have been hugely positive. That is one of the big trends of 2012. However, walking into 2013, it is up to us, the financial advisers and the investors to really work closely with each other and get into a more consultative mode, decision making mode and decide next step whether we should be sitting on the sidelines or coming into the markets. Q: The interesting phenomenon though, is that for the first time in five or six years, one heard of the tax free bonds actually getting extended because of a poor response. What happened there? A: It is a surprise even for us and the community. I will be very honest. If we look at the analysis, what we have come to, is that there is a significant change in investor mindset. Investors are not really willing to commit for periods of seven to ten years. They see a lot of opportunities coming up in short-term. So, maybe they are investors who haven’t yet come back into equity markets but are sensing an opportunity there. That has been one of the high over the last six months of positive returns. They are sensing an opportunity to invest more in debt in short-term. There is little deferential between the short-term yields and long-term yields. Hence, investors prefer to keep their money in short-term, waiting for other opportunities. I think it is just a question of what is the opportunity cost of your money, what are the better choice alternatives you have for your money. So, investors as a trend are not willing to commit for seven to ten years at this point of time and that is affecting the flows into these long-term tax free bonds.

Q: Regarding debt funds, since there is still a fair amount of uncertainty with regards to the precise timing of the interest rate cuts as we head into 2013, how do you approach debt funds now? Is it better to put your money in some of these open ended funds or do you think you would still stick to some fixed maturity plans (FMP) or even fixed deposits? A: Whenever we look at the asset classes, we feel 2013 is going to be the year of asset allocation where one will be putting his/her money in all asset classes as an investor. There is science behind how much you put within each asset class, how much you put in equity, how much you put in debt. In debt, what we have been doing is that, we have been allocating money between short-term debt, long-term debt and between dynamics. We believe that we are still taking a conservative stance. We have been waiting for the rate cuts for about a year and half now, they haven’t happened, but there is high likelihood the likelihood has been there for the last year and half. We would see interest rates coming down and therefore, there is a capital appreciation opportunity for investors. They could get very reasonable double digit returns in debt funds. However, that does not mean you should go and put everything in long-term debt funds at this point of time, because there is a downside also. If interest rate goes up for any reason, we would recommend putting more money in the short-term debt funds. To have a kind of up-lay in the market to interest rate movement, dynamic funds are good. If you see the return of dynamic bond funds where you give discretion to the fund manager to put money between long-term and short-term debt on your behalf, that is a flexibility which the fund manager deserves. If you see the returns of dynamic bond funds, they are more or less equal to long-term bond funds. Hence, there should be more allocation to short-term debt and dynamic and lesser to long-term debt.