MUTUAL FUNDS

Given our belief that interest rates are going to soften hereon, we have extended duration in our short term products <
28-Nov-14   18:09 Hrs IST

Mr. Killol Pandya

In an interview with Capital Market, Killol Pandya, Senior Fund Manager- Debt of LIC Nomura Mutual Fund said, Investors having a medium to long-term investment horizon it is appropriate to go in for duration products such as MIPs, Ultra short term and short term funds, dynamic bond funds and PSU bond funds.

Excerpts:

1. What are your views on fixed income market? How have the yields moved and which direction you see them moving in near to mid-term and why?

We appear to be at the beginning of an interest softening cycle. It is widely held that interest rates shall see a downswing and its only the timing of the rate cuts that is moot and being discussed. As a function of this, we advise retail investors to stay invested in debt funds and keep a smaller portion of their monies at the shorter end of the curve (Liquid and ultra short term funds) and venture out confidently towards products which are longer on the yield curve with the balance monies albeit in a calibrated manner.

2. What is your strategy for short term funds?

Short term products are designed for those investors who have a moderate risk appetite - who are interested in taking advantage of yield movements but also interested in keeping their risk within limits. Given our belief that interest rates are going to soften hereon, we have extended duration in our short term products. However, due care has been taken to make sure that the value at risk doesn't exceed what is acceptable to investors.

3. What reforms you expect for curtailing fiscal deficit and why?

While it is a simple enough statement to make or plot as an equation, bridging the fiscal gap is easier said than done. From the perspective of the economy, the fiscal deficit (along with the Current Account Deficit) can cause severe constraints and hamper fiscal as well as monetary policy actions. However, the government too has to balance the pressures on inflation and currency with the need for economic growth, while also following its agenda of financial inclusion and development. We should also not forget that a large economy such as ours usual hosts complex situations that often lead to delays.

Having said that, some of the broad measures which are being considered include rationalising government expenditure and curbing non-productive demand. On the other hand, government income too may be boosted by pushing through revenue generating proposals such as those related with FDI and divestment. Crude oil prices cooling down and a stable currency had added to the fact that as of today our fiscal deficit appears to be within the limits of the accepted trajectory set by the government.

4. Kindly share your views on recently falling inflation? Is there possibility of inflation rising? Why?

The CPI and WPI both have seen significant cooling off in the recent times. While the WPI drop may be attributed to a sharp fall in crude prices, the CPI cooling has its roots in the relatively benign food inflation scenario.

As of now, it appears that the inflation trajectory is set to meet RBIs target of 8% (CPI) by January 2015. However, sustainability of this trend remains to be seen. Food inflation is heavily dependent on Monsoons and crude oil prices are quite sensitive to global geo-political situations. Both these factors are outside the direct control of our authorities and these factors are causes of worry to debt market players

5. What's your investment strategy?

The approach to debt investments is primarily guided by interest rates and their movements. Since credit risk is of primary concern, we follow a bottom-up approach for stock selection. While following a bottom-up approach to investments in debt papers, due care is taken to reduce liquidity risk and risk spreads are also evaluated to generate aplha. Further, as the debt instruments are not standardised, due care and analysis is done to understand the structure of the instruments and the risk-return potential before making an investment decision

6. When do you expect the RBI to reverse the policy stance and why?

With regards to rate cuts, RBI has been hinting at avoiding a rate cut in the upcoming policy. However, given the current inflation trends and other macro economic factors, it may well be that RBI begins curtting rates in its February interaction. As of now, we may consider RBI softening rates by 50 to 75 bps in 2015

7. If the interest rates fall from here what will be your strategy for long term debt funds? and what is your advice to the investors?

As mentioned, earlier, we hold that we are at the peak of the interest cycle and that rate cuts may occur sooner rather than later. Given our long-term economic growth estimates and our long-term inflation trajectory, our medium to long-term view has an undertone of bullishness. In such market conditions, I think that for investors having a medium to long-term investment horizon of say more than six months, it is appropriate to go in for duration products such as MIPs, Ultra short term and short term funds, dynamic bond funds and PSU bond funds.

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