Finally, we rounded up the session by meeting Mr. Sivakumar (Fund Manager - Debt) and got his views on the interest rate scenario, debt funds the retail investor must look at and how income funds can be evaluated.

Pfn: What is your view on debt markets? We have seen a period of double-digit growth in income funds and now fund managers have cut down expectations.

Mr. Sivakumar: Interest rates have fallen very sharply from 12% to 6%. Obviously we are not going to see an equally sharp fall from 6% to 0%, unless we go the Japan way, which is unlikely. From this point the fall will be steady. To the question whether interest rates are going to go up, I will reply that worldwide there is no trend of rates going higher. In other words, we haven’t seen a reversal of the lower interest rate trend prevailing worldwide.

We have seen relatively higher inflation in the country, but in the Indian scenario, we haven’t yet witnessed a sharp correlation between inflation and interest rates. Industrial growth has also picked up more than expected, but again this is more export-led than consumption-led. And to top it all, I think the liquidity in the market is so high that there seems to be no rationale for increasing interest rates. For these reasons, I believe interest rates will not climb, but at the same time, they have come down quite a bit and the decline will be very gradual going forward.

Pfn: Within the debt fund market, we have many options for the investor, like government securities (gsecs), corporate bonds, liquid funds. Where should the retail investor be with so many options at his disposal?

Mr. Sivakumar: I would categorise gsec funds as sectoral debt funds. Over the last 2-3 years, they gave phenomenal returns, unmatched by any fund in the debt category. But that was due to the falling interest rate scenario. Going forward it is unlikely that gsec funds will give a similar return. In future, I believe liquid funds will mobilise the largest monies as parking avenues for corporates. For the retail investor, bond funds suit the profile the best. These two funds (liquid and bond) in my view will garner a lion’s share of assets.

Another category that we have experimented with last year is lower grade paper. In a growing economy like India, lower grade paper has a lot of potential to graduate to higher grade. With an AAA paper you can only expect economy returns, but with AA-/AA/AA+, there is potential for higher return in the event of an upgrade.

Pfn: While evaluating income funds, what are the parameters one must consider?

Mr. Sivakumar: Apart from duration and maturities, which change frequently, one must look at stability in returns. Some funds perform well in spurts, which tends to distort the performance over the longer period. For instance, it is possible that a fund has only performed significantly over the 6 months, which makes the last 3-Yr performance look good. An investor looking at the 3-Yr performance could be misled into believing that this is a good fund, while in reality it is a mediocre fund. So investors must look at rolling point-to-point returns, so as to get the best and worst phases of the fund and filter distortions.

Then one could also look at variance (standard deviation) in performance. This allows investors to understand the fund manager’s style. You could also track the historical (NAV) performance of the scheme. Look for funds with an above average performance. That is where we have tried to be – in the above average peer group by clocking the least variance in returns.