Invest across Debt Products

What is your outlook for fixed income?
I think markets look very interesting right now, because of different kinds of opportunities available. Firstly, from a recent historical perspective, short term yields are attractively-priced right now. To give you some comparisons, before the forex crisis, yields were on the lower side during the beginning of last year. One year Certificate of Deposits (CDs) were around 8.25 per cent levels, which have now moved to 9.60 per cent levels. Though the yields had remained higher during the forex crisis in May-June 2013, they have certainly moved up further now. The same is also true for highest rated 'AAA' papers which are currently trading above 9 per cent. So from absolute yield perspective, the market looks reasonably attractive at this point of time. While traditionally nobody has associated G-Secs with higher yields, but fact of the matter is, today everything other than 10-year benchmark is above 9 per cent.

There are several reasons why the yields have remained at such high levels. Growth of the economy has remained low and we had issues regarding Current Account Deficit (CAD) and foreign exchange. Rates hardened because of the central banks' action. Then, during the last quarter of 2013, we saw inflation spiking up which also impacted the rates. However, both the issues have been addressed effectively since then and we are witnessing some stability in domestic markets. Most heartening thing is that in the latest emerging markets sell-off, India has been one of the best markets and that speaks volumes about the decisions taken.

So we have stabilising macro environment on one side, along with inflation which has broadly peaked out but which may stay at elevated levels in the next few months coupled with weak growth conditions. These are not ideal conditions where we can see fixed income markets rallying significantly, but we expect things to stabilise and the markets to rally over the medium term. We believe there are some opportunities that should be immediately captured from the investors' perspective. We also think that short term debt funds which run a duration of one-to-two years should be considered favourably, because liquidity conditions have improved in the last few months. Long term debt funds have not performed well in the last six months because of the forex crisis and inflation issue. We strongly believe that if there is a strong and stable government at the Centre, then both the new Government and Reserve Bank of India (RBI) will come together to address growth and that is the period when long term debt funds will do well.

What is your view on interest rates?
There are two aspects of interest rates: one is of the policies by the RBI and other is how much of the policy action is priced into the rates. Long term rates will react most to the inflation and to other market variables. Markets don't wait for RBI to hike/cut rates. Long term rates were in the high range of 9 per cent even in December, before even the rate hike that came in January. Markets will always pre-empt the change in rates and are not going to wait for the RBI to cut them. In fact, RBI action on rates will have most impact on the shorter end of the yield curve whether it's on the rate cut or liquidity infusion. Long term rates will always react to macro economic views. We believe the long term yields will calm down and start coming down once we see some stability in inflation and currency and there is moderate pick up in growth. We may witness volatility in interest rates over the next three-four months, which would eventually come down post elections.

Given the situation, what is your investment strategy?
Currently, we are adopting a slightly conservative approach and are focused more on the shorter end of the yield curve. There is tremendous opportunity right now for investors to start allocating money into debt funds. For the longer end of the yield curve, we are constructive for a view of 18 months considering that the next few months may be volatile. So, say for example, if in the long term duration funds we are running a 'x' duration today, then we will be running an 'x+1' somewhere after May. Secondly, we follow conventional approach in terms of our credit outlook and today, we are positive on those companies which have managed well during the downturn. So we will be taking selective credit view which would be very company specific and try to maximise returns by investing in good quality companies.

With expectations of fall in interest rates hereon, how do you manage your long term funds?
In the peak, the duration of our dynamic fund was close to six years, today it is below four years. We don't want to take duration to zero, because like I said earlier, macro economy stability and peaking out of inflation are positive for long term bonds from medium term perspective. We are not invested fully because there might be volatility in the near term. We want to use volatility to our advantage and increase our duration over the period of time. So, we might gradually increase the duration in the next three-four months.

What is your framework on taking a duration call today?
Our fundamental portfolio strategy would be based on our view on the market. Once we have that in place, we overlay technical factors like demand-supply. For example, our view might be positive on interest rates over the next 18 months, but technically we are not sure of next four months of demand supply situation. So once the demand supply and inflation stabilises, then we would incrementally hike the exposure towards longer-end duration. So for fundamental view we will do intensive amount of research on both macro perspective as well as credit perspective. Once we have done that, then we can overlay technical factors and then decide how to run the portfolio. So, if our medium term view warrants an exposure to G-Secs, but if we believe there is demand supply mismatch in the near term, we may hike exposure gradually.

What is your strategy, especially for short term funds?
As said earlier, the short term rates are relatively higher than they were a year ago. Even macro fundamentals have changed in the last one year which has resulted in higher rates. As a fund house, we take interest rate views based on liquidity and macro conditions, which we believe will remain tight for the next two months. So our short term objective will be to reap benefits in the next 8-10 months as rates are likely to fall from April onwards.

What is your framework of taking credit call today? What kind of credit risk you don't take at all?
We can always stand out and say that in terms of credit research expertise and credit research process, we have the strongest team in the industry. We have a four member credit team from a process perspective. Their work is only to do credit research and they don't manage the funds. A large part of credit research is primary research which means that we have direct interaction with borrowing entities. We also do lot of market intelligence, because we believe that papers of 'AA' or 'A' rated companies are new to the capital market as they would have been taking loans from the banks. So in such scenario, we talk to market participants, bankers and even auditors to understand the dynamics of their business. We even take input from our equity team while doing the debt analysis in terms of promoter quality and business within that particular sector. We have a very strong performance track record in terms of credit selection and we will continue to focus on good quality papers. Though pricing is very important, we don't look only at the price aspect and assign a large importance to quality. I would say that our research is not driven by pricing but pricing is driven by research.

As a debt fund manager, what is your biggest concern today?
Though the macro environment has been stable lately, it's still fragile. We need the current stability to continue for a while before investors gain confidence to get back in the market. Apart from macro stability, we need political stability, which also indicates that the next general election will be a crucial trigger and will be closely watched by market participants. Finally, we have seen muted growth in the past two-three years and that is a concern for overall economy. Once we see revival in growth, every other thing will fall in place. A stable Government will give confidence to RBI take measures to encourage growth and to companies to invest more which can change the gloomy situation.

What advise do you give to investors for short term as well as long term perspective?
Investors who have a time horizon of 6-12 months should restrict themselves towards the shorter end of the yield curve. Investors willing to invest with an 18 month time frame should incrementally look at duration funds, post March. Accruals focused investors who don't want duration in their portfolios should look at traditions products such as bank FDs or FMPs. However, I also believe that just like equity investments where investors invest across different categories, even in debt products, investors should have allocation to short term as well as long term debt products.