The events of the last few months have made debt funds extremely cautious about liquidity mismatch
Ideally, debt funds should have celebrated the turn of events. Interest rates have peaked; investors are looking for options outside equity; corporate borrowers are starved for funds; and mutual funds remain the only large intermediary in the long-term market for debt. However, the events of the last two months seem to have put a spanner in the works, and funds have become extremely cautious about their portfolios. While funds have always remained sensitive to credit risk, they were willing takers of market (interest rate) risk. They also played a liquidity intermediation role, investing in illiquid debt paper while providing ready liquidity to their investors. The stress from liquidity demands have now converted debt funds into staid products that would not only have a conservative portfolio, but also one that matches maturity profiles on both sides of the balance sheet, very closely. One hopes that after a brief phase of withdrawal, mutual funds will come back with debt products that enable channeling the savers? funds into long-term debt markets. We badly need those long-term debt funds.
Gilt funds catch investor fancy
Investor interest in short-term government security funds (gilt funds) has increased. Those that look for the security of government borrowings, and the low volatility of short-term debt instruments seem to like this product. Gilt funds had been launched in 2001-02 to serve the needs of provident funds that invest predominantly in government securities. But before they got the approvals from the Labour Ministry and decided to invest in 2004, the cycle had turned. Gilt funds shrank in size during the period after 2004, due to lack of interest in a rising interest-rate scenario. Now interest is reviving, both from institutions seeking better returns, and retail investors seeking safety.
Unyielding dollar
Investors in gold have been awaiting a weakening dollar, which does not seem to have come any soon. A weakening dollar is positive for gold prices, and most expect the weakness in the US economy to impact the dollar sooner or later. There are, however, two forces keeping the dollar up and gold down. First, the reserve holdings of most economies continue to remain in US Treasury bills. There is no indication yet that these reserves will be pulled back, given the overall weakness in the global economy and lack of viable alternatives. Second, countries that have pegged their currencies are still unwilling to let go, creating the need for them to increase rather than reduce their dollar reserves. The demand for dollar continues despite the weakness in the US economy, keeping the dollar up and gold down.
Withdraw FD proceeds on time
Sanchit and Sukrit Ghosh had invested in IDBI Suvidha fixed deposits which matured in 2005. They did not receive intimation about the maturity of the deposit from the bank, and they had also forgotten about it. They approached the bank to understand what their options were. They were told that they would be able to choose a re-investment option, but would have to wait for the deposit to mature after another three years. They could otherwise claim the matured deposit without any interest. They would like to know if they can be allowed to claim the deposit with interest now, interest being paid only for the elapsed period.
In the case of most bonds, including the RBI Savings Bonds, it has now been clarified that interest will cease to accrue after redemption date, even if maturity proceeds have not been claimed. Only on re-investment on maturity date will such interest accrue. The options to the investor are to roll over the deposit for the entire re-investment period, or seek payment of maturity proceeds without interest. If they need liquidity, they could take a loan against the deposit.
Nomination-related woes
Amrita Pandit wants to know if she will be able to nominate both her sons to all her investments. She recently lost her husband and had to run from pillar to post to claim the investments made in his name. She would like her sons to be spared that hassle. Only a few government investment options (PPF, PF, and postal deposits) allow multiple nominations. In the case of mutual funds, shares and bonds, she has to name a single nominee. She needs to check the nomination features of her investments, and nominate both her sons according to those features. She also has the option of writing a will, indicating how the investments will be split.
