"January has not exactly been the best advertisement for equities," said Ajay Srinivasan, chief investment officer at ITC Threadneedle, a joint venture between India's ITC Classic Finance and Threadneedle Asset Management Limited of the U.K. The firm is likely to launch a debt fund in March.
"The [stock] market has been so volatile that people are willing to go for debt," Srinivasan said Wednesday.
Indian shares have fluctuated wildly since the start of the year. Prices rose sharply in January on government assurances that a new package of market-boosting reforms would be unveiled. But hopes were dashed last week when the government said the expected package actually consisted of measures already taken since January, prompting a steep sell-off in stocks.
Analysts say share prices will remain volatile in the run-up to India's federal budget, due on Feb. 28.
Leading players which are preparing to launch debt funds in the coming months include Tata Asset Management, Alliance Capital, ITC Threadneedle, Birla Capital, Sundaram Newton and Merrill Lynch.
"It's not just a fad," said the country manager of a company preparing to launch its debt fund later this month. "Investor interest in debt can be seen in the success rate of bond issues since last year."
Indian equities were in the doldrums for most of last year and firms turned to the debt market, raising more than 60 billion rupees through a series of successful bond issues.
The secondary market for debt instruments is in its infancy with little activity. Debt trades are currently limited to government securities, or gilts.
"For the mutual fund industry, it has become easier to do a debt product today than it was under the old regulations," the country manager said.
"There was pent up supply in the pipeline and you're seeing some of that supply manifest itself," he said.
The Securities and Exchange Board of India, or SEBI, said it had cleared 14 proposals which plan to invest primarily in the debt market after the rules were recently relaxed.
U.S. investment company Templeton fired the debt-fund trend by launching its domestic income fund earlier this week.
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