ANZ Grindlays pins hopes on maiden bond fund

The bulls are returning to the Indian bond market, but a potential rate hike could stunt its growth.

ANZ Grindlays, India's oldest foreign bank, will close the IPO of its first domestic bond fund on 7 July after receiving "good" response from the market, the bank's chief tells

The fund will begin trading as an open-ended fund in August, targeting institutional and retail investors who are eager to capitalize on the bond market's resurgence in India. The Indian government is planning to raise more than Rs1 trillion through market before 31 March 2001.

Grindlays Super Saver Income Fund marks the bank's entrance to the Indian mutual fund market and couldáprove crucial to the manager's plan to establish itself as a specialist debt fund house. Girija Pande, the bank's chairman, says the combination of a fickle equity market, strong demands in the debt market and the company's reputation in money management will ensure the fund's success.

DSP Merrill Lynch Bond Fund led the bond fund market in the six months to February with a return of 16.24%, followed by Templeton at 15.53%, Alliance at 15.42%, Prudential at 15.21% and Birla at 14.17%.

Sluggish trading

Trading in the bond market has been sluggish since May, with a weak Indian rupee against the US dollar sparking domestic interest rate hike fears. An auction of more than Rs40 billion ($896 million) of government bonds on 8 June received poor response from the market, with only Rs15 billion sold for a yield of 10.70%.

Pande says the auction result, however, is not indicative of the Indian bond market, which he believes will experience exponential growth in the longer term. While he concedes that further rate hikes in the US by up to 50 basis points are possible, he declines to speculate on how this would play out in the Indian market.

Ashish Agrawal, assistant vice-president at Merrill Lynch, also blames a volatile forex market for the general fall in bond prices in May. But he recommends "cautious buying on dips", and believes demand for quality debt instruments will pick up as the forex market begins to stabilize in late July.

Grindlays Super Saver Income Fund invests 60% in corporate debts, 35% in gilts (sovereign bonds) and 5% in at call money market. Up to 90% of the fund's investment will be held in debt instruments with triple-A rating, the vast majority of which will have more than one-year maturity.

Pande says the fund will suit investors with a time horizon of at least six months. The fund charges zero entry load, but a 0.5% exit load is applicable if redemption is made within six months.