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Inflation, Govt borrowings hold the key for debt funds

Nilanjan Dey

DID the RBI over-react? That seems to be the issue uppermost in the minds of debt funds, now that several days have passed since the apex bank reacted sharply to a nervous rupee. And before a concrete answer is found, one is confronted with the question whether interest rates would remain volatile in the months to come.

Fund managers agree that apart from the behaviour of the rupee, the key factors would be inflation and the pattern of Government borrowings. Investors in debt funds, therefore, need to be aware of these determinants before they make further commitments. They should also note that if the going gets tougher, debt funds could see further changes in NAVs.

While funds are ruling out devaluation of the currency, there is a growing expectation of further changes in interest rates. Such changes, however, are likely to be temporary in nature. Inflation, too, is expected to go up from its current level, a feeli ng based on the assumption that the fiscal deficit will be more than the target.

As for the equity market, there is little change in earnings expectations of funds. Quite a few of them continue to be bullish on equity inflows in this quarter, the somewhat indifferent show put up in the last quarter notwithstanding.

The market is still waiting for announcements on the pension reforms front. Investment by pension and provident funds would be a welcome step from the point of view of adding liquidity and depth to market.

Continuing with equities, investors can expect fund managers to be cautiously optimistic, keep a diversified portfolio and stick to their software and technology holdings. The Indian tech sector, as a fund house remarked recently, will continue to depend on the US market, while Europe is catching up firmly with investment in tech and e-commerce applications. This, it is hoped, will hedge against any possible fallout of a slow-down in the US economy.

Equity funds' focus on IT companies continues, thanks to the perceived sustainability of their businesses and strong management. The recent erosion in valuations of frontline IT stocks, however, has been a cause of concern, especially for those who have short-term gains in mind. The next set of quarterly results, one hopes, would alter the mood of the markets vis-a-vis these corporates.

Meanwhile, gross purchases of equity funds (Rs. 436.9 crores) for the month (till August 10) were higher than gross sales (Rs. 398.4 crores) by Rs. 40 crores. Gross purchases of debt funds stood at Rs. 266.1 crores, as compared to gross sales of Rs. 343. 6 crores, a difference of about Rs. 78 crores.

Fundspeak

The debt market in our country lacks depth. That, however, should not desist fund managers from looking at securities that have the basic comforts - safety of investment, good credit ratings and high returns. -- Krishnamurthy Vijayan, CEO, JM M F.

The retail investor has never been out of the reckoning. Given the recent market turbulence and the loss of confidence that has followed, retail money has once again become an important factor for funds. -- Prabal Nag, Vice-President, JM MF .