Citibank, Schroders launch new mutual fund

Sandy Darmosumarto, The Jakarta Post, Jakarta

Citibank and investment fund management company Schroders signed an agreement on Wednesday to launch a new mutual fund focussing on medium-to-short term government bonds bearing fixed returns.

The relatively benign inflationary environment and the continuous decline in the interest rate on Bank Indonesia SBI promissory notes are some of the reasons for Citibank and Schroders to set up the fund.

"With the SBI continuously declining, consumers are looking for alternative products to invest in," said Batara Sianturi, director of retail banking with Citibank.

According to statistics, the yield from investing in government bonds is on average between 11 and 13 percent, which is much higher than the current SBI rate of around 8.5 percent.

"We are optimistic that interest rates will maintain their low level and that mutual funds bearing fixed returns will become the choice of investors," said Michael Tjoajadi, president director of Schroders Investment Management Indonesia.

Michael expected that the SBI interest rate would remain in a range of between eight percent and ten percent, lower than more than 13 percent prevailing at the beginning of this year. He also expected that the central bank would keep inflation in a range of between four percent and six percent.

It is expected that lower inflation will help increase the demand for government bonds because they provide investors with stable earnings without having to worry that they will lose their gains to higher prices for goods and services.

This is why government bonds are deemed a safer investment amid declining interest rates and lower inflation. In addition, such bonds entail the smallest risk relative to other instruments.

Bloomberg data shows that yields on government bonds rose by three percent, from 10 percent to 13 percent, between mid-August and mid-November.

Over Rp 20 trillion (US$ 2.4 billion) worth of government bonds are to be re-issued next year. The sources for this high volume are bonds sold by banks aiming to achieve better liquidity and newly issued bonds used by the government to finance its infrastructure projects as well as to re-finance its debt.

About Rp 400 trillion worth of government bonds has been issued. On average, Rp 90 trillion worth of bonds are traded every quarter, said Michael.

Batara added that "the flexibility to diversify mutual fund investment between the bond and the money markets will allow investors to divide their risks between fixed income and money market instruments." The new financial product will also utilize term deposits, SBIs, and T-bonds in order to cater to investors with various risk preferences.