INVESTMENT: Debt funds need further simplification

As per the new categorisation of schemes, 16 debt fund categories have been notified by Securities and Exchange Board of India. These are a bit like the menus at dhabas, which have a variety of paneer dishes in different forms and gravies. The idea was to bring uniformity in the schemes, so that investors would be able to evaluate and make the right comparison among them. Earlier, each fund house had a different name for a type of scheme and often, investors found it difficult to figure out the schemes to compare.

While the recategorisation is a step in the right direction, it has ended up causing more confusion. Firstly, there are too many categories. Secondly, and more importantly, individual investors do not understand technical words like Macaulay duration, used in the scheme characteristics. Thirdly, some schemes have changed the management strategy to the extent of moving from being aggressive medium term funds to banking and PSU funds. With all this, the few investors who invest in debt funds are not sure whether to continue holding or exit their investment and new investors are even unsure of which fund to buy.

Sebi should consider coming out with a guidance note to simplify matters for individual investors. Some points that can be worked on are:

(1) Demarcate schemes meant for individuals from those meant for institutional investors. For example, schemes such as long duration, gilt funds, floater funds, etc, are really not suited for individuals. Further, schemes like liquid funds and low duration funds, which are suited for both individuals and institutions, can be mentioned as is. 

(2) Explain the meaning of Macaulay duration in layman terms. One suggestion would be to use investment horizon as a means for the individual to decide which category to choose for investment. Thus, if a person is looking at investing for a one-year period, he could consider the low duration fund. With this, customers will have a reference for the investment timeframe, for categories like the PSU & Banking debt fund, corporate bond fund, and credit risk fund as well. At present, investors are not sure of the holding period for these funds.

(3) Highlight the risk of choosing a particular category – for example, if an individual has a long-term horizon, he has the option of a long bond or a dynamic bond fund. Having an idea of the risks associated would help in evaluating the options better.

(4) The details of those debt funds that have changed their strategy significantly needs to be highlighted, as most investors are not aware of how to assess portfolio changes.

(5) Reduce or merge some of the categories.

The main issue individual investors face is in figuring out which type of debt fund to invest into. Having categories associated with time horizon and risk profile, would help them judge which fund to buy. Like paneer, which is the common ingredient in the dishes, investment horizon becomes the common factor and all other aspects like credit profile, sector exposure, liquidity, etc, become the add-ons, much like spices and gravies. Choosing a debt fund should be as easy as deciding a paneer dish to order at a restaurant.

The writer is director, Finsafe India and co founder, Womantra