Wealthy investors exit stocks, get debt for safety

THE uncertainty in equities has prompted wealthy investors to reduce exposure to shares and invest in short-term debt schemes that invest in instruments with a maturity of less than one year. Wealth managers said that drying up of money supply in recent weeks has pushed up yields of short-term instruments, boosting return prospects from funds that invest in such paper.
“The portfolio yield on these funds are 6.5-7%, which is very attractive in the current scenario,” said Om Ahuja, head-wealth management, Emkay Global Financial Services. “Investors are attracted to these investments as they provide a cushion to their portfolio while giving them steady returns,” he said.
Short-term debt funds, which constitute over half of the mutual fund industry’s assets of roughly Rs 8-lakh crore, invest in commercial paper, bank certificate of deposits and money market instruments. Returns from these instruments have gone up, as withdrawal of money by telecom companies and banks has made funds scarce. Wealth managers said that yields on one-month paper have risen to 6.5% from about 4% recently.
Mr Ahuja recommends investing in Kotak Short-Term Debt Fund which gave an annualised return of 8.15% and Birla Dynamic Bond, which returned 7.2% annually. But some warn that Sebi’s recent move directing mutual funds to mark their short-term debt paper to daily closing prices from July 1 will increase volatility in short-term bond funds.
Some investors are putting money in gilt funds, which invest in government paper. While some are investing as part of their longterm plan, a section of investors expects short spikes in government bond prices. “The current rally in the bond market seems to have caught the imagination of many market participants where the benchmark 10-year government securities rallied from 8.1% to almost 7.5%. So, debt funds were able to give a return of more than 12% while large-cap funds gave a negative return of 0.36% in the past two months,” he said.
Equity mutual funds are yet to see a huge redemption yet, but flows into these schemes have fallen significantly in recent months. “Incremental flows in equities have dried up over the past three months, suggesting many investors have shifted a part of their portfolio to short-term corporate bonds as the interest rates have spiked up,” said Shuja Siddiqui, V-P, wealth management, Motilal Oswal Financial Services.