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The role of the small time retail investors as players in the financial products market is miniscule and seems to be invisible most of the times. There have been the occasional incidences when there has been an upsurge in the activities of small retail investors. One could always wonder as to where they had disappeared for all these years.

In recent times there has been a renewed interest in debt funds and incidentally there has been also sufficient proof that the debt funds have been faring better then the stock market index. For example, a study carried out by CRISIL, the credit rating agency, has revealed that their General Debt Fund Index has given a higher return than the Sensex (30 shares) during the period 1st April, 1997 and 5th September, 2000. The BSE Sensex gave an annualized return of 8.92 percent during this period while the Crisil General Debt Funds Index posted an annualized return of 12.72 percent.

On yet another Funds front, the Crisil Balanced Funds Index has also returned a higher yield of 32.03 percent as against the Equity Funds Index, which gave a return of 30.71 percent during the same period.

All of the above phenomena in the Debt Fund Index and the Balanced Fund Index can be attributed to the fact that debt has emerged as a superior asset class when compared to equity. Fund managers now look at Debt instruments, as superior performers while equities are incremental performers. This explains the success of balanced funds, which as an investment category, have seen the assets under management rising rather ballooning during the last year.

It has also been noticed in recent times that the assets under management for private sector funds when compared to public sector mutual funds have also posted better returns as indicated by the Crisil general equity private sector fund index as compared to the general public sector equity fund index.

The individual small time investors too have recognized the above happening and have begun to base their decisions on a calculated basis rather than the mob sentiment. Take for instance the occasion when there was a strengthening of market rate of interest, which resulted in a downward correction in the NAVs of all debt funds. Some investors in debt funds found it difficult to digest that a portfolio investing predominantly in fixed income securities witness a decline in NAV without any news of default from the corporate world.

The Asset Management Companies had a tough time explaining that the increase in market rate of interest has increased the expected yield from the funds and the investors who were expecting a particular level of returns from their debt fund can now onwards expect a higher yield unless and until there is a further correction in the interest rates. The long term investors are not going to be impacted by the decline in the NAVs because the decline has also brought about an increase in the rate of growth in NAV and the setback received by the funds are soon to be compensated.

The increase in the rate of interest was expected and the fund managers were prepared for this increase and had cut down the portfolio duration considerably. But it could not obviously be made zero as zero maturity profile means maintaining only cash holding in the portfolio which has a cost.

As mutual funds are instruments meant for term investments and not for speculation, the investors have fairly long term horizon and hence the decline in NAVs of the debt funds are not a cause of concern as the potential yield from these funds has gone up compensating for the recent decline. The investors have now understood the nuances of such occurrences on the performance of funds and have wizened up to make the best decision on their investments.

  Deepak V Kuriakose

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