The Hindu Business Line : "This fund will work irrespective of interest rate trends" — Mr Naval Bir Kumar, MD, Standard Chartered Mutual Fund

Debt investing today is a complicated business. With interest rates changing direction ever so often, you can no longer afford to park your investment in a top-ranking debt fund and forget about it. If you want to pep up the returns from your investment, you may have to shuffle between classes of debt funds to the make the best of the prevailing interest rate trends. Standard Chartered Mutual Fund has just unveiled All Seasons Bond Fund, a Fund of Funds that promises to do just this, on your behalf. Mr Naval Bir Kumar, the managing director of the fund house, spoke to Business Line about how this product works.

Excerpts from the interview:

Why should an investor who already owns an income fund or a floating rate fund consider All Seasons Bond Fund?

This is an asset allocation product which will actively switch between classes of funds to deliver the best returns to investors. Debt funds can essentially be classified into three categories — passive funds (income and gilt funds), active funds (dynamic bond funds) and accrual funds (floating rate and liquid funds). In any given interest rate trend, only one of these classes can deliver the best returns to the investor.

For instance, in a rising interest rate scenario, accrual funds may do well. In a falling rate scenario, gilt and income funds will do well. In a range-bound market, active funds may do well. Yet, the investor may find to difficult to switch between these three classes.

All Seasons Bond Fund will do this for him. The fund will allocate money between these three types of debt funds to make sure the investor earns the best return.

As a Fund of Funds product, will it be investing in debt funds from across fund houses?

To begin with, we will be choosing only from the funds managed by Standard Chartered Mutual Fund. We may consider including funds from other houses, if someone launches a new product which offers a compelling alternative.

But aren't you narrowing your choices too much? Standard Chartered may not be managing the best performing debt funds in every class...

Yes, we may not be. But we think picking a trend is more important than picking the right product within a class. Over the past year, passive income funds have turned in negative returns of 4-5 per cent; while a floater (floating rate fund) would have earned you a positive return of 4-4.5 per cent.

If you selected the best income fund, you may have got a return of a negative 3 per cent; but you would still have done much worse than a floater.

The offer document mentions a management fee of 0.75 per cent for this fund. This will be in addition to the expense ratios of 1-1.5 per cent for debt funds that you invest in. Will you be able to offer a competitive return on this product, net of costs?

Controlling costs is another reason why we would like to choose from within our own basket of funds. If we choose from our own debt funds, we already earn a management fee on it and need not charge an additional fee on the All Seasons Fund. Whereas, if we choose products managed by others, our fee will be added, which may cut into the returns.

Though SEBI allows us to charge 0.75 per cent as management fee for a Fund of Funds product, we may not be charging this on the All Seasons Fund, if we invest only in our own products.

Where will this fund invest now, given the present interest rate scenario?

The yield curve has steepened a lot, but we believe that it could steepen further. So for the present, we will be focussing mainly on accrual products, which includes floating rate funds and liquid funds. Once we feel the yield curve has begun to flatten, we may move into active debt funds.

Can an investor, in today's scenario, generate inflation-beating returns by investing only in debt?

Yes, he can. The yields on corporate bonds have today edged up to 7.25 per cent or thereabouts and may edge up further. Even net of the expense ratio of about 1-1.5 per cent will earn you an inflation-beating return.

(The All Seasons Bond Fund is a Fund of Funds which will be investing in other debt funds. It offers retail and institutional plans. IPO opened on August 9 and closes on August 27. Readers are requested to compare this product with ones offered by others before investing.)

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