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Nivesh Jaagran A trip down the memory lane of debt funds

A trip down the memory lane of debt funds

Open-end debt funds complete 23 years of existence.
Shreeta Rege Aug 7, 2018

Hi guys, I am debt fund. For many of you, I am the less glamorous cousin of equity. While, equity is always in the news for good or bad reasons, my slow and steady moves governed by factors like interest rates and currency seems more complicated in comparison.

I know you are somewhat familiar with me but today let me tell you my history.

UTI MF first introduced me to Indian investors with a scheme titled UTI MIP Fund. I was essentially, a five year closed ended assured return product. UTI offered investors guaranteed returns paid via post-dated cheques. Inspired by this concept, UTI and a few public sector fund houses launched me in close-ended avatar many times.

The next turning point of my life was introduction of open-ended debt funds. In April 1995, JM Mutual Fund launched the first medium duration fund (currently, medium to long duration fund). The next few years saw launch of many other categories of open-ended debt funds. To name a few Aditya Birla Sun Life Corporate Bond Fund (previously Aditya Birla Sun Life Short Term) launched in March 1997 and UTI Money Market Fund launched in April 1997. However, money market funds had a 30-day lock in period. Aditya Birla Sun Life Mutual Fund did away with loads in their Birla Cash Plus Fund (currently Aditya Birla Sun Life Liquid Fund) in June 1997.

The following year i.e. 1998 was a memorable one for me. In June, ICICI Prudential Mutual Fund launched Prudential ICICI Liquid Fund whose NFO was one of the biggest then in terms of assets collected.    

The year also saw Kotak Mutual Fund launching two new categories of funds in December, Kotak Banking and PSU Debt Fund and Kotak Gilt Investment. Continuing its innovative streak, Kotak launched the first FMP in October 1999.

Another monumental point in my journey was the launch of Pioneer Money Management Account in 1999. It was the first debt fund to have a fixed NAV of Rs. 1. Any gains were credited to the investor’s account as new units. You can say that the fund was a precursor to daily dividend reinvestment plan of liquid funds. Moreover, the fund was the first to offer a chequebook facility to its investors. However, it had to discontinue the facility due to a RBI mandate.  

From my modest beginnings as a close-ended fund, I now have many avatars such as credit funds, corporate bond funds and so on.

Over the years, I have gained wider acceptance in your portfolios. A look at my asset growth, from Rs. 49,410 crore in December 1999 to Rs. 11.11 lakh crore on December 2017 is a testimony to that acceptance.

To make it easy for the growing investor base, SEBI instructed mutual funds to categorise open-ended debt funds into 16 distinct categories.  This categorisation can help both existing and new investors understand me better.

Now, let me share a brief history of performance indices, which you can share with your clients too. This will help them understand return potential of different categories of schemes.

As you can see, return volatility is less in schemes investing in low duration securities like liquid funds, ultra-short-term funds, low duration funds and short-term funds. In the time duration mentioned in the table, these schemes have delivered returns in the range of 7% to 8%. Broadly, liquid funds tend to deliver returns comparable to savings bank account while short-term fund returns tend to align closer to term deposits and short-term bank FDs. Conservative investors can consider allocating a certain portion of their debt allocation to these funds to generate superior tax adjusted returns.

Medium and long duration funds on the other hand have potential to generate higher returns at higher risk. Matured investors who wish to generate excess returns by betting on the interest rate cycle can consider these funds for investments.

In any case, you can say that I have potential to generate better risk-adjusted returns compared to traditional fixed income products such as bank FDs and NSCs depending on your risk appetite. In addition, long term investments are tax efficient compared to bank deposits. Long-term investments are eligible for indexation benefit on redemption.

 

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3 Comments
Snigdha · 1 week ago
Nice narrative Shreeta
Himanshu Maheshwari · 1 week ago
A good retrospection
Sandeep · 1 week ago
Good narrative, taken us back to the glimpses of the history!! I might sill have the cheque book of Kothari Pioneer MMA scheme.
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