MUTUAL FUNDS

Key factors driving yields going ahead will be inflation, fiscal deficit, currency volatility and global crude and commodity prices<
28-Jan-15   18:08 Hrs IST

Mr. Akhil Mittal

In an interview with Capital Market, Akhil Mittal, Senior Fund Manager - Fixed Income, Tata Mutual Fund said, We think it will be a difficult task for the government to meet the 4.1% fiscal deficit target for FY 15 on account of over estimation of revenues from tax collections (over estimation on account of tax buoyancy and over estimation on nominal GDP), slower disinvestment and high taxes refunds.

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? What will the key driving factors for yields?
  2. Fixed Income markets have been performing very well with interest rates seeing a secular downward movement on account of continuous fall in inflation and subsequent change in monetary policy by RBI leading to a rate cut. Going ahead, we believe that inflation will keep coming down and remain within RBI comfort zone. Our estimate is that CPI will come within range of 5.50% to 6% by March 2016 and 5% by March 2017. As a result, we expect RBI to further ease monetary policy going ahead. Our estimates are repo rate cut of 100-150 bps over next couple of years and hence interest rates come down in a secular move. Government has also shown commitment to keep fiscal deficit within targets which gives further confidence to RBI to ease monetary policy.

    Key factors driving yields going ahead will be inflation, fiscal deficit, currency volatility and global crude and commodity prices. Also global central bank actions will determine flow of capital towards growth economies like India.

  3. What is your strategy for short term funds? What is your exposure to long term funds and why?
  4. In line with our view on interest rates, our strategy in short term fund is allocation towards accrual portfolio and alpha opportunities in duration. We have increased our average maturity of short term strategy to 2.5 yrs to 3 yrs with close to 10% allocation towards g-secs (tactical) and about 7-8% allocation towards long corporate bonds. We maintain a high credit quality in our corporate bond position and restrict below AAA rated exposure to less than 20% in our short term fund. Hence high credit quality, regular accrual and alpha generation allocation is our strategy in short term fund.

  5. With only three months remaining in FY15, how to expect government meeting its fiscal deficit target?
  6. We think it will be a difficult task for the government to meet the 4.1% fiscal deficit target for FY 15 on account of over estimation of revenues from tax collections (over estimation on account of tax buoyancy and over estimation on nominal GDP), slower disinvestment and high taxes refunds. Having said this, there is still a chance that government might just be able to meet its target by cutting down on expenditure and expediting disinvestment and spectrum allocation. Also, with global crude prices falling sharply, government has seen its subsidy bill reduce substantially and has moped up some revenues by increasing excise duty on petrol and diesel. So government might just meet its target (though will be a very difficult task).

  7. Kindly share your views on recently falling inflation? Is there possibility of inflation rising? Why?
  8. Tight monetary policy by RBI (dis-inflationary process), fall in global crude and commodity prices, slowdown in rural wages hike, and government actions towards food prices have led to fall in inflation in India. Though there is no imminent possibility of inflation rising suddenly, any shock on crude / commodity prices internationally or food prices spiking up sharply can lead to inflation going up again. As I said, the probability of this is low as of now.

  9. What's your investment strategy?
  10. Our Investment approach is twin sided, wherein we analyze the Macro variables like - Inflation, twin deficits, growth etc from top, and micro variables like - deposit / credit / M3 growth, volatility, demand supply, etc from bottom. Within this, a portfolio strategy is adopted keeping in view the objectives of individual schemes. There would be continuous risk monitoring parallel on the portfolio. Research, Portfolio constructions, Portfolio monitoring and delivery would be the cycle of investment process. We would keep in mind the concept of SLR (Safety, Liquidity and Returns) and not allow risk to go beyond desired levels.

  11. Your views on RBI repo rate cut?
  12. RBI has already reversed its stance from tight monetary policy towards easing the policy by its rate cut move on Jan 2015. RBI had indicated in past also that once its stance changes from tightening to easing, it would follow the new stance. Hence we believe that future policy stance of RBI will be towards easing only in medium term.

  13. If the interest rates fall from here what will be your strategy for debt funds?
  14. As mentioned above, we believe that we are headed for lower interest rates as we expect RBI to cut repo rate by 100-150 bps over next couple of years. Hence we will be running higher duration in our debt funds to capitalize on alpha opportunities arising out of fall in interest rates. We would maintain credit quality of portfolio's and not dip down the credit curve.

  15. What is your advice to the investors?

In accordance to our view on interest rates, we would advice investors to invest in debt funds as per their interest rate risk appetite.

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