Which debt fund would you suggest to an investor now?
For investors, our recommendation as always will be to choose funds based on risk appetite and investment horizon. Over the last few months, policy statements from the RBI, growth and inflation news flow had raised market expectations for rate cuts, which resulted in a sharp rally in the bond markets. Typically, long-bond or gilt funds, with higher interest rate sensitivity do well in a monetary easing regime. But in the current environment there remains some uncertainty about future direction of the monetary policy. The RBI has indicated that its ability to support growth may be hindered by any spike in global or local risks on the inflation front and currency movements, amongst other factors. In this scenario, we believe investors will be better off investing in a portfolio of fixed income funds providing a combination of high coupon income along with capital gains. Long duration strategies would be better suited for investors with longer investment horizon and comfortable with higher volatility.
Broadly, we continue to remain positive on the corporate bond segment and believe that believe that accrual strategies should continue to fare well. We believe the monetary easing cycle will be uneven and high accruals can reduce impact of market downside. At the same time, our portfolios remain well positioned to take advantage to benefit from capital gains as interest rates come down over the medium term.
What should be an investor's exit strategy in a falling interest rate scenario?
The exit strategy should ideally depend on the investor’s financial goal/investment timeframe. In falling interest rate scenarios, higher maturity or duration funds tend to do well and in a rising interest rate environment, lower maturity funds tend to work well. We are working on few products that will help investors sail through interest rate cycles, which we believe is a better construct than the current offerings in the market.
When building a debt investment portfolio, how important is the rating?
Credit ratings provide an insight into the borrower’s ability to repay debt and thus, are an important factor in the process to understand risk-reward associated with investing in a security. The credit rating is, however, an opinion and can differ. Rating agencies largely base their views on previous financial track record and existing position of the company. As a fund house, we tend to go beyond externally published ratings and undertake independent in-depth research on the candidate company. Our evaluation takes into account various quantitative and qualitative factors including future business prospects, and as appropriate, we also leverage research from our equity teams.
What is your fixed income strategy, especially for short- and long-term bond funds?
The strategy remains the same across interest rate cycles – in our view, alpha can be generated through a blended approach of top-down allocations and bottom-up security selection. This means we manage portfolio maturities in line with our views on the macro-environment and policy developments (within the investment mandate of the fund). The attempt is to take advantage of the mispriced opportunities within this space through bottom-up fundamental research.
Broadly, we continue to remain positive on the corporate bond segment and believe that accrual strategies should continue to fare well. We believe the monetary easing cycle will be uneven and high accruals can reduce impact of market downside. At the same time, our portfolios remain well-positioned to take advantage to benefit from capital gains as interest rates come down over the medium term.