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TRUST Mutual Fund entered the Indian mutual fund space with a banking and PSU fund in January last year. As of February 2022, the AMC has over Rs 1,000 crore in assets spread across four debt categories - overnight, liquid, short duration and banking and PSU. As the AMC enters its second year in the fund industry, we caught up with its Chief Executive Officer, Sandeep Bagla, to discuss various dimensions, ranging from his outlook on the debt market to the investment case for credit strategies.
You initiated your MF business with a sharp focus on debt products when interest rates were at their historic lows, and so was investors' interest in these funds. How do you visualise things going forward?
The products we introduced in the fixed income space were well structured, thought through and have performed consistently for the investors. Our first product, TRUSTMF Banking and PSU, is a roll down, top quality product with a clear positioning to perform during a rising interest rate scenario. The strategic knowledge partnership with CRISIL and our LimitedACTIV method of fund management have helped protect investor interests as well.
We at TRUST MF believe that yields could rise more from here due to persistently high inflation expectations. We will be launching a set of differentiated products in the coming year across multiple asset classes.
Fund managers have generally been saying that the yield curve is steep. However, the investment narratives are divided between investing in relatively medium to longer-duration funds to benefit from the current steepness or taking cover in short-duration funds. The negative impact of rising rates is limited here, and the assets come up for re-investment sooner. Please help demystify all this for a retail investor.
Inflation is the single most important factor determining the level of interest rates, and hence bond market returns. If inflation is expected to go up, returns from bonds are likely to be low. The steepness of the curve itself does not justify taking interest rate risks. Bonds tend to perform well when inflation is expected to come down and remain low.
Let's take an example- Say the curve is steep. However, if the 10-year yield rises by 100 bps and the short term rates rise by 150 bps, the curve will become flat. The investor will experience significant capital loss if invested in the 10-year bucket. So, relying on just the steepness of the curve is not sufficient.
Short-term funds benefit from the roll down benefit and can perform reasonably well if the rate increases are mild, measured and gradual. There can be periods of low returns when short-term rates are on the rise. If one remains invested in short-term funds, one can be advised to keep investing when yields are rising so as to undertake effective averaging as well.
Would you advocate taking exposure to credit strategies in the current times? Of course, while people have had bad experiences earlier with such funds, there is a big difference in returns right now. What should investors do? Also, as a fund house, what is your game plan regarding introducing such strategies?
Credit strategies can be good income generators if deployed prudently. Sophisticated investors with a high-risk appetite can generate superior returns over time. In the open-end MF format, these strategies are difficult to manage as the underlying markets are quite illiquid, making it difficult for the investment team to generate cash to meet redemptions. Also, it is difficult to procure reliable data on issuers to make informed decisions. We at TRUST MF are likely to undertake credit strategies only once we are sure we can take these risks in a structured and objective manner.
RBI's Retail Direct portal has given a choice to retail investors to invest in government securities directly. With G-secs offering around an average 6 per cent right now, how do debt mutual funds compete?
Govt bonds are excellent instruments when an investor knows her investment horizon and can invest in a bond matching the investment horizon. However, in real life, investors deploy money seeking returns and may not undertake goal-based investments. The returns from a bond or bond fund are from the coupon and the mark to market valuation. Mutual funds are experts in managing the interest rate risk and hence can deliver superior returns over and above the coupon income.
You are running your liquid fund as a laddered portfolio with an allocation to bonds maturing in different duration segments. Can you please elaborate on this? How will investors benefit from this over any other liquid fund?
A laddered portfolio is a portfolio invested in various maturity buckets along the yield curve. A portion of the portfolio would be maturing almost in a daily manner. In a rising rates scenario, the portion matured could be reinvested in a longer maturity bucket, thereby boosting the overall portfolio yield. In case of net redemptions in a fund on a day, the maturity proceeds could be used to meet the redemption. Such a strategy can reduce the churn ratio and minimise the impact cost as well.
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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