Good time to invest in Debt funds

When equity markets are giving sizzling returns, we tend to forget about asset allocation and join the herd in maximising returns by aggressively tilting our portfolios towards equities. It’s only when equities land with a thud, like it has done in 2008 (the Sensex has dropped 60 per cent from its highest closing on 8 January, to its lowest closing on 20 November), that we flock towards alternate asset classes. Asset allocation is about striking a balance according to your needs and risk profile, across all asset classes. One important asset class that was long forgotten has staged a quiet comeback. It’s safer and less volatile, and merits attention in 2009. Reintroducing the humble debt fund.

Low interest rates
Debt funds and interest rates are inversely proportional. When interest rates fall, net asset values (NAV) of debt funds rise, and vice versa. India, as in the rest of the world, is witnessing drastic rate cuts. The global credit crisis has slowed down economies across the globe. India’s industrial production recorded a negative growth of -0.4 per cent in the month of October, as against a positive growth of 12.2 per cent the same time last year. Due to an unprecedented decline in domestic and foreign demand, industrial productivity has dipped for the first time in more than 13 years.

The ensuing liquidity crunch has hit us hard and the banking system has been starved of cash. Already banks have been finding it difficult to lend money and are also facing the threats of defaults. Companies are expected to deliver poorer results because of fall in demand for goods and services. Added to that are the revised growth projection of 7.5 per cent for India, down from 8 per cent earlier. India, like many other economies, is facing a slowdown, if not a recession.

As a move towards boosting economic activity and ensuring liquidity, central banks all over the world have been cutting interest rates. Says Laxmi Iyer, head, fixed income, Kotak MF: “Interest rate cuts have now become a worldwide phenomenon so that economies do not go into recession. Interest rates are cut to spur growth in the economy, to make funds available at cheaper costs to facilitate low-cost borrowing and increased production activity.”

In India too, the Reserve Bank of India has cut its key rates repeatedly between October and the first week of December and made over Rs 3,00,000 crore available to the banking system. The benchmark interest rates were again reduced on 6 December 2008 as part of the government’s economy stimulus package as a signal of a benign interest rates regime.

Drop in inflation
Another reason why interest rates in India are headed south is a drop in inflation. From a high of 12.91 per cent in August, inflation has fallen to 8.90 per cent, as on 8 November, due to a fall in oil and commodity prices. typically, when inflation is high, interest rates are kept at a higher level to keep the real rate of return (interest rate earned after deducting inflation) high.

Says Ritesh Jain, head, fixed income, Canara Robeco MF: “Inflation is expected to come down to around 4-5 per cent levels around March 2009 and to near-zero levels in June 2009. If inflation is low, the government’s monetary policy will be in your favour as, in India, monetary policy follows inflation.” In short, in India, low inflation indicates low interest rates.

Reduction in Spread
Typically, bond funds invest in two kinds of instruments, government securities and corporate bonds. A debt fund’s NAV largely depends on which of the two segments it has invested in and in what proportion. When interest rates fall in these segments, bond funds’ NAVs appreciate. Although interest rates on debt scrips have come down, rates of
government securities have fallen more than those of corporate bonds.

For instance, the benchmark 10-year government security rate has fallen to 6.79 per cent as on 3 December, from 9.47 per cent on 15 July, a reduction of 269 basis points. In comparison, interest rates of a similar AAA-rated corporate paper haven’t dropped as significantly. The difference in the interest rates, called spread, between the two kinds of papers has in
fact widened to around 396 basis points in November, up from around 138 points in July.

Says Nandkumar Surti, chief investment officer, fixed income, JP Morgan MF: “This spread will have to narrow down as interest rates are on their way down. Interest rates of corporate bonds will, therefore, have to come down too.” When spreads reduce, bond funds will benefit more than gilt funds.

Debt funds
We suggest you consider long-term gilt funds and long-term bond funds. While gilt funds will solely invest in government securities, bond funds would invest across all debt asset classes such as government securities, corporate
bonds or certificates of deposit.





Asset allocation. “Invest around 50 per cent of your corpus in gilt funds and the rest in bond funds,” says Iyer. Note that while government securities are safer than corporate bonds since the former comes with a government guarantee, they could also be more volatile as they are the most liquid of all debt scrips and, hence, change more hands. However, Surti recommends a tilt towards bond funds as he believes the spread compression, when it happens, will result in bond funds outperforming gilt funds. By one estimate, well-performing debt funds are expected to give 15-20 per cent returns in 2009.

Some of the fund houses listed in Outlook Money recommendations (‘Strongest Bond Funds’ and ‘The Brightest’) have both bond and gilt funds. Although both kinds of schemes from all these MFs are worth investing in, we suggest you diversify across fund houses.

Duration. Look at long-term debt funds with a time horizon of one year. Avoid them if your limit is less than six months. Go for liquid funds if you want temporary parking space for your funds. Or, you could go for short-term bond funds if you are willing to take the risk, for tenures of not more than three to six months.

Watch out for...
...Credit quality. While government securities are guaranteed by the government, a bond fund’s portfolio carries credit risk. The more your fund’s assets are in higher-rated securities (AAA-rated and equivalent, including government securities), the better it is, for two reasons. One, fund insiders say that the default risk that plagued the fixed maturity plans (FMPs) not so
long back, is still around. A bond fund that takes on too much credit risk might put your principal amount at risk. Two, higher rated securities are also more liquid and can be easily sold by your debt funds.

...Maturity. As long-term funds will benefit more than the short-term funds going ahead, look at your fund’s average maturity. Avoid funds with a lower maturity.

South India tour: Day 6 - Ooty (29 December 2008)

Taj Savoy Hotel is as beautiful as it can get. It is an old heritage hotel and the management has done its best by any standards to maintain its rich heritage. The beautiful and self contained cottages are neatly nestled amidst the beautiful and manicured hotel gardens. Very English type. All rooms have a fire-place, the staff will light it up for you as and when you request them. A well lit-up fire place lasts for an hour and its warmth can last for an entire night. The staff is very cordial and friendly as with any other Taj property staff, food is just exquisite with a sumptuous buffet offering over breakfast, lunch and dinner. 

So after a heavy and delicious breakfast, I headed off to Ooty railway station, in time to catch the 9.15 narrow gauge train to Coonor. This is a must-do in Ooty. But even though as recommended by the Taj reception to reach the hotel by 8.30 am to stand in the ticket queue (tickets are given on a first-cum-first-served basis), I was way behind in the queue. It has to be God's intervention I firmly believe that I still managed to not only get tickets, but I also got one of the best window seats, despite a mad rush and scrambling to get in the train. Thankfully, station masters were present at the station and there was a queue to get inside the train. The views that you get from the train are breathtaking, especially as you approach Lovedale station (2nd stop, right after we leave Ooty). The train was on time, the speed was just right and numerous photo opportunities. Remember, take II class ticket (only Rs 4/-), avoid I class as the I class compartments' windows do not open fully. And take a seat to the right side, going towards Coonor, left-side while going from Coonor to Ooty.

Coonor is a beautiful hill station, though I found both Ooty and Coonor very commercialised. Tea estates (picture 1) , Sim's Park are a must-see there. I had lunch at the Taj Garden Retreat at Coonor since my package included lunch too. Taj has a good system, they have synchronised their Ooty and Coonor properties so that we can lunch at either of the two places even if our package covers only one of the two hotels. 

After a sumptuous and yet again delicious lunch, we headed back to Ooty, this time by car. Ooty's botanical gardens is a beautiful place, but then again, if you've seen one garden at these places you've seen them all. But Doddabetta peak was different and a good experience. You get fantastic views of Ooty from here, the highest point in the Nilgiri mountains. My last stop was a boat ride at the beautiful Ooty lake (picture 2) before we checked in back at our hotel, had a nice cup of tea in the lawns outside the hotel's tea lounge amidst the cool winter breeze.  

South India tour: Day 5 - Bandipur Tiger Reserve (28 December 2008)

After checking out of Misty Woods, and this time reaching the highway to Mysore (en route to Ooty) correctly, we were on the main highway in three hours flat. Taking the outer ring road of Mysore and bypassing the foothills of Chamundi Hills, we were on our way to Ooty. 

I stopped briefly at the Bandipur Tiger Reserve - a vast expanse of protected forest land in South Karnataka and home to wild cats such as tigers, leopards, panthers and also deer, wild dogs and an array of snakes like Cobra and Python. The sightings on that day I was there were very poor as I was told by a senior forest ranger with whom  I had a nice, long chat. But I  decided to take a chance. Jeep tours were discontinued but buses were there and fortunately I happened to be 

 there a good 1/2 hour before the next bus ride. 

No, I did not spot any wild cat. But no regrets! The safari was good (45 mins), it was my first ever safari, so in that way, it was quite memorable. I only spotted langoors, deer and wild boars. 

We continued on our way to Ooty, past by the Bandipur and later Madumalai Wildlife Sanctuary and a subsequent 30-km steep climb on the ghats leading to Ooty. We checked in the magnificent Taj Savoy Hotel. 

South India tour: Day 4 - Coorg Dubare Elephant camp (27 December 2008)

Back to our sightseeing ways, today was a visit to the Dubare Elephant Camp. This is a unique elephant camp where elephants are preserved, nurtured and kept in safe surroundings. So after a a 2-hour ride, past bustling towns of Virajpet and massive coffee estates of Siddapur town, we reached Dubare. A small boat ride took us across the elephant camp. You could also wade through waters and what looks like a natural pathway of rocks to get across if you are adventurous. It ought to be great fun! 

The elephant camp's main attraction is an

 elephant ride (Rs 100 per person). Three rogue elephants (one of which was caught a couple of days before I went after it had gone on a rampage destructing property, farms, etc.) were held in large wooden cages and were being tamed.

At the camp, names, sex and ages of all the elephant members are listed and next to it is the kitchen where their food is cooked in a gigantic bowl that was boiling at the time I was there. Knowing an elephant's appetite and the enormous quantity of food these creatures need, I was not surprised that an elephant ride costs so expensive. 

Meanwhile a baby elephant was clamouring for our attention and was ably surrounded by its doted parents. I patted the baby elephant and realised its hide was extremely thick with thorny little hairs. Magnificent creatures, these elephants are. 

South India tour: Day 3 - Coorg Misty Woods (27 December 2008)

Hotel Misty Woods is a holiday resort deep in the forests of Kakkabe in the district of Coorg. It's a task reaching there allright, with numerous twists and turns along the narrow -and at times muddy roads -winding through the densest of the forests. The forests and the greenery of Coorg is unbelievably beautiful. But because Misty Woods is so deep inside Kakkabe, it's always recommended to reach here before dark. It gets really dark after sunset. But once you reach Misty Woods, you are in heaven. The resort is on a steep hill, the reception is below and the cottages (only cottages here, not rooms) are scattered all over its hilly property. The cottages are beautiful, very heritage type, typical South Indian superior woodwork. No T.V. and heater are its only minuses. But these are small sacrifices to be made, and if you are in Coorg, you have ample of nature for good company. Savour it while you're there; it's quite unlike anything you've seen before. The manager Daniel -ably assisted by his team -was committed to make our stay a memorable one. 

As we were quite tired with all the travelling the day before, we decided to take the day off and

 remain enveloped in nature (picture 2). Misty Woods is a huge property, and offers ample of scope for short walks and treks. It's a hilly area all the way, so I had to do a lot of climbing up and down whilst exploring the beautiful area, coffee (picture 1), pepper, cardamom plantations and also a waterfall in the vicinity apart from a small and deserted ancient Palace just outside the resort complex that is manned by only one gatekeeper (entry free) . As I said, I am not complaining!

South India tour: Day 2 - Mysore-Coorg (26 December 2008)

After a heavy breakfast at Hotel Sandesh - The Prince (great hotel, value for money, very clean, good food and centrally located), I proceeded to the Mysore Palace. A beautiful and a very imposing structure, this is Mysore's biggest attraction. Unfortunately cameras aren't allowed inside, else I would have freaked out. Wonderfully and artistically built, it's interiors are India's ancient architecture at its very best. The authorities have also maintained it quite well. The Durbar Hall is quite unlike anything I have ever seen. It's very grand and gives a commanding view of the palace grounds in front. 

Then, we proceeded to Chamundi Hills. There's a temple on top of it, but since I was there on a Friday -and the temple is most visited on Fridays, hence it was very crowded -and I decided to give it a miss. So we proceeded down the hill again, taking in breathtaking views of Mysore city from up the hills and passing by the Nandi Bull -an imposing structure of Lord Shiva's mount. Within minutes, I was heading towards Coorg. A brief lunch stopover at a roadside restaurant called Hotel Annapurna where delicious south Indian fare was had and savoured, served over traditional banana leaf, much like during Parsi weddings and navjotes. But this time, the fare was complete vegetarian. But I am not complaining at all. And very economical too. Rs 55 for a heavy lunch for two! Can you beat that? 

Next stop: The Tibetan Nandroling monastery. The monastery is in a small town called Bylakupe, I am told this is one of the largest Tibetan settlements in India. The monastery, like any other Tibetan place of worships, is spotless clean. The Tibetans sure know how to not only decorate their places of worship with fantastic and unbelievable architecture, paintings, artifacts, etc, but also to maintain them. The monastery is also called the Golden Temple. It glints in the far distance as you approach it. It's worth spending easily an hour here and just savour the beauty and positive aura of this magnificent place. 

Half an hour on the highway further is Cauvery Nisargadham, a small forest connected to the mainland by a rope bridge. Nothing spectacular here, but just like anywhere else in Coorg, the beauty of the nature and forest is on display here and at best a short walk along the long and winding pathway in the forest is recommended. 

After driving for a further three hours (20.30 hrs), we reached Misty Woods, in complete darkness. I had almost torn by hair apart by then. What ought to have taken us just three hours from Hotel Annapurna where we had earlier had our lunch, we reached after five hours because we missed our turn, stopped over at the above two places, and did not head the advice to reach Misty Woods before dark. 

South India tour: Day 1 - Mysore (25 December 2008)

The new Bangalore airport rocks, it's the best Indian airport I have seen so far. However, there's hardly much to be seen after you disembark as you are quickly led to the baggage claim area and in no time, you are out. 

I decided to skip Bangalore taking ample cues from several recommendations from friends. So I proceeded straight to Mysore. My first stop was Srirangapatna, former capital of Tipu Sultan. I stopped by the most important tourist destination in this town - Dariya Daulat Baug (picture 1). This was the summer palace of Tipu Sultan. It's set amidst beautifully manicured and vast lawns. From the outside, the building looks quite ordinary, however it has a treasure of precious paintings, coins, swords, guns and such ancient and historical artifacts. 

Next stop: Brindavan Gardens (picture 2). The one thing that you notice once you enter this place is its ample number of water fountains. We were there at about 17.00 hrs, but the place really comes alive once the lights come out at 18.30 hrs. Although in hindsight, i felt it was a good idea to reach there a good hour or so before sunset so that there's enough light to admire the beauty of the gardens and then also get to see it under the lights. A brief sound & light show also takes place at either the north/south-end (I was unable to figure out the directions) of the gardens. This is like the water fountain in all colours and music being played in the background. Something like the Ballagio musical fountain in Las Vegas. But if you've seen the latter, you will easily forget the Brindavan gardens sound & light show. 

Following is the video I shot whilst taking off from the Bombay airport. It was a very hazy morning, so the views aren't spectacular. Enjoy!