What should be an investor’s strategy in the debt market, with yields beginning to fall? We posed this question to Sujoy Das, Head Fixed Income, Religare Invesco Mutual. Read on to know what he has to say.
Do you think inflation pressures have subsided?
The headline inflation is undergoing a structural decline. The softening of price pressures and disinflationary forces within the system has led to moderation of prices. Government’s attempt to keep food price rise at bay though moderation in the MSP hikes along with some small changes in the APMC Act targeted to control spiralling prices formed due to cartelisation in the wholesale markets has yielded results. RBI’s maintenance of high yields in 2014 has also resulted in some decline in the inflationary expectations.
The actions of both the government and the RBI have led to moderation in inflationary forces. Moreover, the slowdown in demand in Europe and China has resulted in decline in commodity prices in the international market. The softening of international prices has supported in the drop in domestic inflation. Since the drop in inflation appears to be a structural decline, the real rates are expected to be contracted over time.
What is your view on how a retail investor can play the interest rate cycle at present?
Retail investors are encouraged to get invested in long duration gilt funds and long duration income funds to reduce the reinvestment risk and also benefit from price appreciation in bonds due to falling yields. The yields are expected to steadily decline over the quarters from the present level. The real rates are expected between 1-2% (as per RBI Governor) over the following 2-3 years. Investors are encouraged to select funds with modified duration 3 times their investment horizon, during this phase of rate decline.
You have credit-focused funds. Not many AMCs are keen on taking credit risks. How do you identify these and capitalise on them, even while keeping risks at bay?
The objective of credit focussed funds is to identify credits with a potential of improvement in credit fundamentals, credit rating upgrade and mispriced ( or value) credits. The rigorous independent internal credit risk assessment to identify credit worthiness of issuers along with calculating optimal borrowing capacity of the issuers helps us in identifying appropriate credits for the funds.
The credit assessment covering both quantitative and qualitative aspects of every borrower helps in identifying credit worthy issuers. The database of information and data of over 410 credits of the previous few years and over periods of distress helps in keeping the risks at bay.
The economy is also expected to perform better over the following years as investment cycle picks up and the real GDP growth improves with improvements in demand. The credit risk appetite is expected to improve and the perception of credit risk is also expected to improve over time.
As part of an investor’s long-term asset allocated portfolio, what kind of debt funds are suitable for a long-term buy and hold, without having to worry about cycles?
The corporate bond opportunities-type of funds is ideally suited for an investor’s long term allocation towards bonds. The superior spreads of credit along with a moderate modified duration of the portfolio bodes well for a long term allocation towards bonds.
We have seen that gilt funds in general tend to provide high returns when rates fall and then returns normalise over a 3-5 year period, making them looking mediocre over the long term. Do you think it could be different this time around? Can retail investors enter gilt with a 5-year plus view?
We expect the structural decline in inflation to continue over the next 2-3 years and the compression in real yields to continue over the following 5 years. Hence, we feel retail investors can look at investment in gilt funds with a 5-year plus view.
Disclaimer: The above is not a recommendation to invest. Mutual funds are subject to market risks. Please read the scheme information and related documents before investing.
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