In the last and final part of this three part interview; Nandkumar Surti, CIO, J.P. Morgan Asset Management shares his views on risks and investments for retail investors
Bank credit growth was falling at the start of this calendar year. What led to it picking up?
The bifurcation is not currently available. Going by the last available data, retail lending was strong. The current factor would probably be oil companies, given the fact that oil prices have gone up and subsidies are not been given. At the same time, discretionary spending has a role. If you look at the growth in 2- and 4-wheelers, it continues to be in the 25-30 per cent range.
The Centre is sitting on cash, parked with the RBI of course, to the tune of Rs 80,000 crore. Why is it not getting back into the system?
Government expenditure comes in a set pattern. The expenditure pattern goes through a cycle as the government has set projects or expenditures which come at particular dates/periods. Probably things will be better now than they were in the last quarter.
For banks, while credit growth is picking up, deposit growth needs to catch up. Fixed deposit rates are only now catching up with CD rates have been high for a while. The 1-year CD rates are at 9.75 per cent, much higher than bank deposits.
Are FMPs attractive because the different between overnight rates and 3-month CDs are high?
In our money market funds, we were running 20-30 days of average maturity and the funds were very consistently performing. Yet we could not match up with the FMP rates. I can churn my portfolio only after 30 days, so I need to manage liquidity and performance during that time.
Three month rates were around 6.5-7 per cent in October 2010, moved to 8 per cent by November and galloped to 9 per cent by December. Money market funds take time; say 1-2 months to catch up with the higher rates. Naturally FMPs have been more popular with investors in the recent past.
Right now where would you advice investors to invest?
I would suggest investing in products which offer the benefits of double indexation.
I would look at short-term bond funds with lower average maturity and which will have the ability to capture the higher rates of February and March. They can then deploy the money and lock it into 1-year rates at that time.
I would also look at FMPs. We are considering launching a few FMPs in the coming months.
Right now there are very good rates at the short end of the curve to lock into. Investors should look to capture these high rates.
What is the risk you are willing to take on your debt funds?
In terms of risk averseness, our motto has always been Safety-Liquidity-Return, in that order. That would explain why we were never caught on the wrong foot since 2007. When we started the fund, real estate, asset backed securities and promoter financing were all big plays from which we kept away. We sometimes compromise on the returns to manage the safety and liquidity. So we are risk averse in managing the money market basket. In general, we are conscious of the credit rating and liquidity of the instrument.
Would you advise a retail investor to invest in a gilt fund?
Gilt funds have not performed badly over the past few years. A retail investor would do well if he stayed invested and did not jump in and out of such a fund. There is more risk in a gilt fund as compared to a money market or short-term debt fund. It will be difficult to comprehend how an interest bearing instrument gave one a capital loss. Such a fund can give losses, though not as high as equity. But because there is a central bank at the other side of the table and the market goes through cycles, if the investor is patient and stays on, he will be rewarded.
Investors should look at this fund only from a 1-3 year period. And during this time, he should stay invested and not jump in and out.
To read the first part of this interview
To read the second part of this interview
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