association of mutual funds of india - crisil ......mutual funds are the best vehicles to channel...

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Debt’s it!Why debt funds are as good a wealth-creation tool as

any, and can also aid in nation building


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Key messages

• Debt funds the next big driver for the Indian MF industry

• Macro environment, tax efficiencies and stable returns make debt funds

an attractive proposition

• But debt has its share of risks, too

• A vibrant MF industry will help fund India’s growth needs


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Debt funds the next big driver of growthBut unlike in the US, participation of retail investors has much room to grow

• In India, key drivers for growth so far include

the entry of private players in 1993, growth in

equity markets, open architecture distribution

and favourable tax regime

• Individual participation in debt and money

market funds is low at 31%

• In the US, debt funds drove growth until the

advent of 401K retirement savings plans, which

invest predominantly in equity

• Debt funds today contribute to 47% of US fund

AUM; 81% of debt investors are individuals

Source: ICI Source: AMFI

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1965 1999 2002 2005 2008 2011 2014 2017

Rs b

illio

n in

assets

India

Equity Debt Money market Total AUM

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1960 1967 1974 1981 1988 1995 2002 2009 2016

$ b

illi

on

in

as

se

ts

United States

Equity Debt Money market funds


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Key messages

• Debt funds the next big driver for Indian MF industry

• Macro environment, tax efficiencies and stable returns make debt

funds an attractive proposition




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Superior returns over comparable options

Returns as on May 31, 2017; Returns for period greater than one year are annualised returns; Green cell refers to highest returns in the period

• Indexation benefit an added advantage for debt funds

Index 1 year (%) 3 years (%) 5 years (%) 7 years (%) 10 years (%)

CRISIL – AMFI Income Fund Performance Index 10.76 9.81 8.91 8.37 8.73

CRISIL – AMFI Gilt Fund Performance Index 12.59 11.28 9.48 8.37 8.19

CRISIL – AMFI Short Term Debt Fund Performance Index 8.90 8.96 9.07 8.65 8.44

3 Year FD Index 8.39 8.85 8.85 8.67 8.33

1 Year FD Index 7.63 8.39 8.66 8.34 8.06

CRISIL – AMFI Ultra Short Fund Performance Index 8.12 8.46 8.75 8.57 8.11

CRISIL – AMFI Liquid Fund Performance Index 6.93 7.94 8.42 8.28 7.76

Savings Bank Rate Index 4.00 4.00 4.00 3.93 3.80

Source: CRISIL Research

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000A

pr-

00

Ap

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1

Ap

r-0

2

Ap

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3

Ap

r-0

4

Ap

r-0

5

Ap

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6

Ap

r-0

7

Apr-

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Ap

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9

Ap

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0

Ap

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1

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r-1

2

Ap

r-1

3

Ap

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4

Ap

r-1

5

Ap

r-1

6

Ap

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7

CRISIL - AMFI Income Fund Performance Index

CRISIL - AMFI Gilt Fund Performance Index

1 Yr FD Index

3 Yr FD Index

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Ap

r-0

0

Ap

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1

Ap

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2

Ap

r-0

3

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4

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Apr-

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Apr-

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Apr-

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Apr-

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Apr-

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Apr-

12

Apr-

13

Ap

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Ap

r-1

5

Ap

r-1

6

Ap

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7

CRISIL – AMFI Liquid Fund Performance IndexCRISIL – AMFI Ultra Short Fund Performance IndexCRISIL – AMFI Short Term Debt Fund Performance IndexSavings Bank Rate Index1 Year FD Index


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Returns more predictable, complement asset allocation

Parameter Equity Debt Money market

Average returns 22.4% 8.5% 7.3%

Standard deviation 34.8% 4.0% 1.6%

Maximum drawdown -61.7% -5.8% -0.3%

Equity, debt and money market represented by CRISIL-AMFI Equity fund performance index, CRISIL-AMFI Debt fund performance index and CRISIL-AMFI Money Market fund performance index respectivelyAnalysis based on 1 year rolling returns since March 2000Source: CRISIL Research

Lessthan -30%

-30 to -20%

-20 to -10%

-10 to 0% 0 to 10%10 to20%

20 to30%

Morethan 30%

Equity 6% 3% 5% 8% 17% 13% 10% 37%

Debt 0% 0% 0% 0.42% 64% 35% 0% 0%

Money market 0% 0% 0% 0% 100% 0% 0% 0%

0%

20%

40%

60%

80%

100% Return distribution

Equity Debt Money market


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Fixed deposits losing sheen

• Interest rates and inflation are at multi-year lows, which reduces the attractiveness

of traditional fixed-income favourites such as bank fixed deposits

Source: RBI, CRISIL Research

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

Ja

n-1

2

Ma

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2

Se

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2

Ja

n-1

3

Ma

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3

Se

p-1

3

Ja

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4

Ma

y-1

4

Se

p-1

4

Ja

n-1

5

Ma

y-1

5

Se

p-1

5

Ja

n-1

6

Ma

y-1

6

Oct-

16

Fe

b-1

7

(%)(%)

CPI inflation (LHS) Repo rate (RHS)

10-yr Gsec yield (RHS) Avg 3-yr FD rate (RHS)


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• Rating action trends indicate improvement, expected to sustain

‒ In fiscal 2017, credit ratio remained largely unchanged from the previous fiscal; debt weighted credit

ratio improved to a five-year high, but remained below 1

‒ Improvement was mainly on account of firm commodity prices, stable macros, improving capital

structure, and lower interest costs

Credit quality recovering gradually

0.0

0.3

0.5

0.8

1.0

1.3

1.5

1.8

2.0

FY-13 FY-14 FY-15 FY-16 FY-17

(tim

es)

Credit ratio Debt-weighted credit ratio

Source: CRISIL Ratings


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Consumption-linked sectors continue to fare betterRating actions of top industries

Source: CRISIL

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5R

eal E

sta

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Luxu

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Ind

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Pro

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Pha

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Investment oriented sectors Consumption & export oriented sectors

Outlier due to weak demand for

gold jewellery retailers

Outlier due to EPC players involved in

roads, transmission and distribution,

and housing


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Key messages







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Risk adjusted return is a monitorablein credit investing

• Illiquidity is an added risk with lower credits

Rating Minimum spread* Average spread*Maximum

spread*CRISIL CDR (3 yrs)

AAA 0.19% 0.90% 2.89% 0.00%

AA+ 0.32% 1.47% 4.49%

0.75%AA 0.73% 2.19% 4.73%

AA- 0.83% 2.53% 5.18%

A+ 0.93% 3.15% 7.28%

4.25%A 1.11% 6.26% 7.76%

A- 1.29% 5.59% 9.06%

BBB+ 1.19% 5.07% 10.11%

5.07%BBB 2.20% 6.72% 10.02%

BBB- 3.62% 7.76% 11.13%

*Spreads across issuers rated by multiple agencies

CDRs: Cumulative default ratesSource: CRISIL Ratings, CRISIL Research


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Interest rate a risk for duration funds

Income funds

Gilt funds

Short term debt funds

Banks' fixed deposit

• Long-term funds gain on declines, short-term funds in uptrends

Income, gilt and short term debt funds represented by CRISIL-AMFI Income Fund Performance Index, CRISIL-AMFI Gilt Fund

Performance Index and CRISIL-AMFI Short Term Debt Fund respectively

CRISIL-AMFI Short Term Debt Fund Index is available from April 2002 (inception)

Banks’ effective fixed deposit rates represented by 3 Year and 1 Year FD Rates, for period less than a year, 1 Year FD Rate has been

considered

^ Absolute Returns

Returns for period more than one year are annualized


4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

11.00%

200

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

2

201

3

201

4

201

5

201

6

201

7

10

ye

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G-s

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10 Year G-sec yield

Secular decline

in yields in

2001-04

Flat or high interest rate

period of 2004-08

Flat or high interest

rate period of

2008-14

Declining

yields

2014-present

Sharp

correct ion in

yields in 2008^

11.37%

16.42%

-

7.32%

4.20%

3.25%

6.42%

6.01%

19.18%

25.71%

5.13%

3.30%

5.73%

3.48%

7.90%

9.75%

10.43%

12.05%

9.26%

8.33%


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Infrastructure, industry need ~Rs 51 lakh crore in 5 years to 2022; debt funds can help

51.39

11.82

10.37

7.83

6.47

5.66 0.46 0.31 0.29

4.091.44 0.94 0.68 0.29 0.26 0.24 0.24

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Debt market development is key to economic growthCorporate debt market nascent compared with others

• While banks and equity markets have seen growth, the debt market, especially

the corporate bond market, is subdued, despite its many virtues compared with

equity

Country

Penetration (outstanding/GDP) – as of Dec 2016

G-secs Corporate bonds

US 83% 123%

China 46% 20%

Japan 195% 15%

South Korea 52% 74%

Singapore 47% 34%

Malaysia 52% 43%

India 43% 19%

Source: SIFMA, ADB Online, CRISIL Research


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Mutual funds are the best vehicles to channel retail money into debt

Source: RBI, SEBI, AMFI

• Significant contributors to CP and CD markets today

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

2013 2014 2015 2016 2017

Share of MFs in total outstanding debt (LHS)

Share of MFs in total outstanding money market instrument (RHS)

Share of MFs in total outstanding bonds (RHS)


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Last updated: April 2016

Disclaimer

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association of mutual funds of india - crisil ......mutual funds are the best vehicles to channel...

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