Investors shift to fixed income plans

Mutual fund schemes, which invest their corpus in government and corporate bonds, are seeing higher amount of inflows in the past few months as increasing number of investors are flocking into fixed income securities on expectation of a fall in interest rate.

In a falling interest rate scenario, the holder of fixed income securities would benefit from a higher bond price. This is because bond yields decline in tandem with interest rates, while the prices of bonds tend to move higher as bonds yields and prices have an inverse correlation.

“Suppose a mutual fund has purchased a debt market paper for `100 carrying a coupon rate of nine per cent and when its yield falls to 8.5 per cent or eight per cent due to falling interest rates, the bond would naturally command a higher premium,” pointed out Mr Suresh Sadgopan, the founder of Ladder 7 Financial Advisory.

The total asset under management (AUM) of income schemes has risen to `3.95 lakh crore accounting for 57 per cent of the industry’s AUM as on March 31, 2013 from ` 3.78 lakh crore AUM reported during the end of December 2012.

“There is a significant opportunity for investors for the next two to three years in fixed income securities as actively managed fixed income schemes tend to outperform the return generated by conventional fixed bank deposit,” observed Mr Kalpen Parekh, the managing director of IDFC Mutual Fund.

Mr Parekh is expecting strong inflows into fixed income schemes of mutual funds for another few months. He claims that high networth investors and corporates who are heavily investing in fixed income schemes

According to experts, corporate bonds with a maturity period of over one year are currently fetching a coupon rate of 8.5 per cent to 9.5 per cent while government bonds are carrying a coupon rate of 7.75 per cent to 8 per cent.