NEW DELHI, May 26: Income funds which were caught off-guard by falling interest rates are trying every possible way to make sure that they honour the promise of paying 15 per cent made to the investors. Some are parking their funds in short-term instruments in the hope that they can shift the funds to papers with better yields when the opportunity comes their way.

The older ones in the game, however, are resorting to inter-scheme transfers.Market sources say income funds are turning towards short duration papers like certificate of deposits and commercial paper. The trend is more pronounced in income funds which tapped investors after the credit policy triggered a decline in interest rates.

According to a secondary market debt dealer, income funds are investing funds in a 5-6 month paper with yields in the range of 9-11 per cent. Adds another dealer, ``Mutual funds expect tight liquidity by the end of this year. This is when income funds will pull out of short-term papers and invest in instruments which yield high interest rates. Besides, some mutual funds invest in money market instruments to tide over temporary asset-liability mismatch.''

The income funds are also picking up high yield debt instruments in the secondary debt market due to limited options in the primary market. Among those active in the secondary market are DSP-Merrill Lynch, Tata Mutual Fund and Birla Global.

``Though fixed income funds prefer to pick up debt paper from the primary market due to the high transaction cost in the secondary market, they have also entered the secondary market of late,'' says an analyst with Darashaw Securities.

Adds another analyst with Delhi-based broking firm, ``Some mutual funds, which recently launched their income schemes, are transferring debt instruments from their old income schemes to the new ones. Thus, while the old schemes book a profit on transfer, the new schemes add debt paper with attractive yield to their portfolio.'' Also, some income funds are offloading their debt instruments to meet their redemption obligations.

The income schemes, which are currently in the market, are also not insulated from the decline in interest rates. These include income plans from SBIMF and UTI, which have assured 15 and 14 per cent returns, respectively. These schemes are likely to be the worst hit as the yield on top rated debt instruments has now firmed at 14.5-15.7 per cent. According to market sources, SBIMF has even asked its brokers to go slow on collections. Says a fund analyst, ``Its the problem of plenty and nobody wants to overshoot the target amount.''

However, M P Radhakrishnan, MD, SBIMF says: ``We have asked our brokers to aggressively sell the income plan and expect to collect close to Rs 40 crore as against our target corpus of Rs 25 crore. We have already tied up a substantial portion of our funds in instruments which will yield 16.5-17 per cent. This will help us honour the assured return without squeezing our margins.''

In fact, UTI's MIP (II) 97 has proved to be a blessing in disguise for SBIMF as brokers are hardselling UTI's income plan, reason being UTI's income plan offers an assured return of 14 per cent for five years against SBIMF's 15 per cent for the first ten months. However, there is no competition for funds as UTI is likely to net close to Rs 1000 crore as against SBIMF's mere Rs 30 crore.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.