Short-term debt funds reduce rate volatility, offer good returns

Short-term interest rates are currently elevated and the yield curve is likely to remain pressured, driven by higher inflationary expectations . The long-term interest rate scenario is uncertain, given the rapidly changing macro factors – both local and international, with the key variable being crude prices and their impact on the fiscal situation. This provides an ideal backdrop for investing in shortterm debt funds. As the name suggests, shortterm debt funds or short duration funds are mutual fund products investing in debt securities that lie at the shorter end of the maturity spectrum.

More specifically, these schemes predominantly invest in debt securities with maturities ranging from three months to about 18 months. Accordingly, these products are positioned between liquid funds, which invest in short-term liquid money market instruments with maturities of up to 91 days and medium to long-term debt funds, which invest in long-dated securities (instruments with maturities that are typically between three and 10 years). The average maturities of short-duration funds range from 0.60 to 1.5 years and depend to a large extent on fund managers' rate views as well as the prevailing shape of the yield curve.

Two-Pronged Benefit

Investing in short-duration funds enables an investor to benefit from regular coupon accruals. Further, since these funds have a lower average maturity than income (bond) funds, the returns volatility tends to be minimal in a rising, uncertain interest rate environment. On the flip side, if rates trend downwards, investors stand to benefit from the possibility of capital gains, in addition to the coupon accruals.

Elevated Yield Curve

Given the tight monetary stance adopted by the RBI and the underlying tight liquidity scenario, the yield curve for most of fiscal 2011 was inverted. So effectively, shortend rates (ie, yields on products with maturities of up to 12 months) traded at higher rates than similar instruments with maturities of 3, 5 and 10 years. For instance, at present a 12-month CD trades at around 9.80% while a 10 year triple-A-rated corporate bond is traded at 9.20%. Accordingly, short-duration funds present investors with the prospect of leveraging the elevated rates at the short end of the curve, given the uncertainty in the longterm rate scenario.

Hazy Interest Rates Horizon

Currently, there is uncertainty over the long-term interest rates. The market expects the RBI to further raise rates to tame the rising inflation. As things stand, inflation came in at 8.98% for March. This was well above the expectations of around 8.38% and higher than the RBI's own target of 8% for the end of fiscal 2011. In the medium-term , too, inflation expectations are high as the market anticipates the secondary impact of fuel prices on the back of rising crude oil prices. Over the last four months, oil prices have risen by 30% and the impact will be felt with a lag once the government passes on the burden to the economy . Due to the prevailing high inflation , the RBI is expected to hike interest rates until inflation expectations and inflation itself come under control. As inflation and credit growth remain high, liquidity could be under strain in the coming months, which would also exert upward pressure on the rates. Given this backdrop, the long-term interest rate outlook is fluid. In addition, the government has only just begun its GSec auctions for FY 2011-12 .

Best Of Both Worlds

Given the combination of currently high coupon rates and the uncertain interest rate outlook, shortterm debt funds offer you the best of both worlds – mitigated volatility and attractive coupon income.

Source: http://articles.economictimes.indiatimes.com/2011-06-14/news/29657146_1_debt-funds-liquid-funds-rate-scenario/2

Sebi Board set to give its nod to Takeover Code

The brass of the Securities and Exchange Board of India (Sebi) has its plate full. At the next meeting of its board, scheduled later this month, the capital markets’ regulator is expected to finally give a go-ahead to the proposed Takeover Code, pending for a long while.

Also on the agenda are new norms for mutual fund distribution and the sensitive matter of the National Securities Depository Ltd, involving Sebi’s former head. The Bimal Jalan report (on the ownership and functioning of market infrastructure institutions) is, however, unlikely to make it to the agenda.

According to sources, the board meet, scheduled for June 27, has been postponed to June 30. The new Takeover Code is the most important matter, as the finance ministry is through with its deliberations, that saw some of the biggest names from India Inc giving suggestions. Sebi is expected to lower the level of mandatory open offer from the proposed 100 per cent.

“It is almost one year since the report was submitted to Sebi but building a consensus proved to be a difficult task,” said a person privy to the matter. “Most industry representatives wanted the open offer size to be reduced from 100 per cent, as they felt it would give foreign acquirers an advantage over their domestic counterparts.”

The Achuthan committee had proposed that the open offer trigger limit be increased from the current 15 per cent to 25 per cent and the acquirer make an open offer for all the remaining shares, i.e. 100 per cent. While industry players go along with the increase in trigger, they want the size of open offer to be reduced to at least 75 per cent.

“It is going to be a significant agenda, as the first board meet of the new chairman (U K Sinha) went unnoticed,” said another person, wishing not to be named. “The roadmap for the current financial year was the only notable matter decided in the March meet. The market is still waiting for some strong signals from the new regime.”

OTHER ISSUES
Apart from the Takeover Code, the levy of transaction costs in mutual funds is expected to generate a lot of debate. Sinha was one of the most vocal critics when former Sebi chairman C B Bhave banned entry loads in August 2009. Sinha, who earlier headed UTI Mutual Fund, formed a seven-member panel in May to examine the MF sector’s grievances on abolition of entry loads. The panel is believed to feel a levy of Rs 100-150 per transaction, along with some other changes, could again make distribution of MF products lucrative.

NSDL is another matter high on the agenda. The regulator has time till August to present its final decision on the matter to the Supreme Court. The board, following a petition filed in the apex court, had met in April on the matter but did not take a final decision. Sebi has to decide if it is ready to restore the Mohan Gopal committee order, which it decided to keep aside in 2009.

The board might also take up a few issues related to the primary market, such as simplification of application forms for Initial Public Offers (IPOs) and a common format for Asba — Application Supported by Blocked Amount — and non-ASBA forms, a long-standing demand.

The Jalan committee report, however, has failed again to make it to the agenda. It is believed the regulator needs more time to deliberate on the recommendations of the committee, formed in January 2010 to review the ownership and governance of institutions like stock exchanges, depositories and clearing corporations.

Source: http://www.business-standard.com/india/news/sebi-board-set-for-nod-to-takeover-code/438969/