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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
• But debt has its share of risks, too
• A vibrant MF industry will help fund India’s growth needs
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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
r-0
1
Ap
r-0
2
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Ap
r-0
7
Apr-
08
Ap
r-0
9
Ap
r-1
0
Ap
r-1
1
Ap
r-1
2
Ap
r-1
3
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
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
r-0
1
Ap
r-0
2
Ap
r-0
3
Ap
r-0
4
Ap
r-0
5
Ap
r-0
6
Apr-
07
Apr-
08
Apr-
09
Apr-
10
Apr-
11
Apr-
12
Apr-
13
Ap
r-1
4
Ap
r-1
5
Ap
r-1
6
Ap
r-1
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
y-1
2
Se
p-1
2
Ja
n-1
3
Ma
y-1
3
Se
p-1
3
Ja
n-1
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
teD
evelo
pm
ent
App
are
l &
Luxu
ry G
oo
ds
Ste
el
Constr
uctio
n &
Ind
ustr
ial m
achin
ery
Build
ing
Pro
du
cts
Te
xtile
s
Agri
cultu
ral P
rodu
cts
Constr
uctio
n &
Eng
inee
ring
Auto
-ancill
arie
s
Packa
ged
Foo
ds
Packa
gin
g
Auto
mo
tive R
eta
il
Pha
rmace
utica
ls
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
• Debt funds the next big driver for 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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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
Source: CRISIL Research
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
ar
G-s
ec
yie
ld m
ove
me
nt
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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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
• But debt has its share of risks, too
• A vibrant MF industry will help fund India’s growth needs
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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
-5.0
5.0
15.0
25.0
35.0
45.0
55.0P
ow
er
Ro
ads
Ra
ilways
Urb
an infr
a
Irrig
ation
Tele
com
Tow
ers
Airpo
rts
Port
s
Oil
& G
as
Me
tals
Auto
mob
iles
Ce
men
t
Petr
oche
mic
als
Pape
r
Textile
s
Fert
ilise
rs
Tota
l
Rs l
akh
cro
re
Infrastructure
sectors
Industrial
Source: CRISIL Research
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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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Thank you
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Last updated: April 2016
Disclaimer
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Actual results, performance or achievement may vary materially from any forward looking statements and the assumptions on which those statements are based.
The Information may also contain business strategies. The success of the strategies (if any) is subject to uncertainties and contingencies beyond CRISIL’s control,
and no assurance can be given that the anticipated benefits from the strategies will be realized.
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