MUTUAL FUNDS

We are nearing the end of the interest rate hardening cycle but may not have yet reached the peak<
12-Dec-11   17:12 Hrs IST

Mr. Killol Pandya
Killol Pandya, believes that we are nearing the end of the interest rate hardening cycle but may not have yet reached the peak. A peaking out will probably be followed by a period of stability of rates before we see softening in the reference rates. In the context of our being near end of the tightening cycle and uncertain of the exact timing of the softening phase to begin,  Dynamic Bond fund and Dynamic Gilt fund products - which can take advantage of the moving interest rates and seamlessly shift across the yield curve to maximise returns, would be the appropriate products for investors. To know the outlook on Rupee, Commodities, Gold and Debt Funds in Calendar Year (CY) 2011, we at Capital Market interacted with Mr. Killol Pandya - Head, Fixed Income of Daiwa AMC.

Here are the excerpts:

What's your call on Indian rupee? Don't you think if rupee continues to depreciate or even remain at current depreciated levels for long, India's growth story is as good as suspended?

INR has seen a very high level of volatility and significant depreciation in the recent times. INR may improve from its current levels but is unlikely to reverse trend and go into an appreciatory mode in the near future.  Rather than being a cause of economic slowdown, it could be seen as a symptom of plateauing Foreign Institutional Investor (FII) interest in the context of slowing growth in the economy. Nonetheless, given the global economic scenario of sustained European sovereign worries, a patchy US performance and slowing Chinese economic growth, the Indian growth story may yet be perceived as a profitable option by FII.

Gold in India has been a great outperformer in CY 2011? What's your view on gold for CY 2012? How much percentage one should allocate into it?

Gold has been preferred in the recent past as it is a natural hedge against inflation and a 'safe haven' in times of financial turmoil. Going ahead, the global economic and financial stress seems unlikely to go away in a hurry and therefore, gold may continue to find favour for some time though intermittent dips cannot be ruled out. In our view, Gold should form part of any portfolio though the extent of allocation would depend on the risk appetite of the investor and his investment objectives. An investor looking for long term gains and having a moderate to low risk appetite should allocate 10% to 15% of his portfolio toward Gold and/or Gold based products such as ETFs.

After remaining at high levels for past couple of years, can inflation come down in CY 2012? Will the Reserve Bank of India (RBI) be able to cut interest rate in CY 2012 or the rate will remain stable? What's your view on investment in debt in CY 2012?

The RBI has explicitly stated its stance on inflation may desist from further rate action if inflation is seeing cooling off. Wholesale Price Index (WPI) inflation is widely expected to stabilise and cool in the coming months. It may not be a sudden drop-off but in terms of the trajectory, the numbers may head south around December 2011 or January 2012. It is likely that the number to be printed in the habitat of 7.5%- 8% by the fiscal end or early in the new fiscal. However, the major concern remains the slide in INR which, if uncontained, can lead to imported inflation causing WPI numbers remaining high. If such a scenario does pan out and Inflation does not cool off, the RBI may eventually revisit the issue of rate hikes in order to contain inflation.

Gilt Funds category has been facing net outflows since December 2010, what has been the reason behind it. Do you see any reversal in the trend in CY 2012?

We have experienced a period of sustained tightening in interest rates in the past 6 quarters. Gilt markets are most sensitive to rate action and it is impractical to expect Gilt funds to outperform short term products in such a scenario.

However, when the interest cycle will turn, it is the Gilt segment which may accrue the maximum benefit of the softening. A similar situation may be seen in the long term bond funds as well though the magnitude of the benefit may be lower. In the context of interest rates softening after a period of stability in the coming fiscal, there is a good chance of the trend reversing in the coming fiscal year.

What kind of debt funds would you be recommending to your investors right now and what are the expected returns from them? Given your expectations of where interest rates are headed next year, would you be advocating short term plans or longer term plans which can take advantage of the double indexation facility?

As things stand now, we are nearing the end of the interest rate hardening cycle but may not have yet reached the peak. A peaking out will probably be followed by a period of stability of rates before we see softening in the reference rates. In the context of our being near end of the tightening cycle and uncertain of the exact timing of the softening phase to begin,  Dynamic Bond fund and Dynamic Gilt fund products - which can take advantage of the moving interest rates and seamlessly shift across the yield curve to maximise returns, would be the appropriate products for investors.  An efficient way of enjoying good returns while also taking advantage of the double indexation benefit would be to invest in a 13 month Fixed Maturity Plan in March.

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