In India, it is still the institutional investors who mostly invest in fixed income mutual fund products. Retail investor participation in this asset class through mutual funds is negligible. This is counter intuitive considering the vast amount of savings that the Indian investors have in bank fixed deposits. If one looks at the asset allocation pattern of Indian retail investors, it is evident that Indians are predominantly fixed income investors by nature and convention. This anomaly is clearly an opportunity for the mutual fund industry.
In terms of diversity of product offerings, the industry has come a long way. Debt mutual fund products come with different permutations of liquidity (or tenors), credit quality and interest rate-related volatility to address various investment requirements based on an investor's investment objective, risk appetite, and time horizon. The product bouquet encompasses liquid and ultra shortterm funds, which invest in money market securities; fixed maturity plans that invest in securities matching the scheme tenure so as to lock in the yield prevailing at that time; income and gilt funds; capital protection-oriented schemes; and a vast offering of hybrid products with different combinations of equity and debt.
The industry needs to invest in increasing awareness among retail investors so that they can take advantage of a wide array of useful products. The product offerings in debt space today are multifold and designed for retail as well as institutional investors — right from avenues such as gilt funds, which typically provide returns in the form of capital appreciation and interest income by investing in government securities of varying maturities, to various short-term investment avenues such as FMPs designed to lock in yields by buying and holding papers of similar maturity, and shortterm and ultra short-term funds, which are more accrual based meant for short-term deployment of funds. At the same time, we have category of funds known as the monthly Income plans that seek to provide regular income through dividends.
While mutual fund as an investment category cannot guarantee returns, the other aspects of investor's reservation can be dealt with by creating awareness towards debt as an avenue towards safety, liquidity and returns. In this reference, I would like to draw reader's attention to the second half of 2008, which has been known more for the collapse of the global financial system. If one were to look at the returns generated by some of the debt mutual funds during this period, one would certainly be surprised. The point that I am attempting to make here is that different asset classes have outperformed at various points of time, and with the ever-changing investment environment, each asset class will have some uniqueness to offer to an investor's portfolio. This point is especially significant in the current scenario when investors are primarily looking at safety of investment and predictability of returns. They could, therefore, consider debt mutual fund as an investment option.
To sum it up, each asset class has its pros and cons and its suitability would be a function of the prevailing market environment as well as investor's specific situation. In the current context, retail investors can lock in investments at attractive yields by investing in FMPs or open ended mid-market schemes like short-term and regular saving funds. Investors who can take some volatility and have a horizon of two years or more can also look at doing an SIP in income funds between now and March 2012.
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