“Depending on an individual’s investment horizon and risk appetite, the right strategy to take advantage of falling interest rates entails investing in longer duration debt funds.” - Gautam Kaul, Vice President & Fund Manager – Fixed Income, IDBI MF

• Depending on an individual’s investment horizon and risk appetite, the right strategy to take advantage of falling interest rates entails investing in longer duration debt funds.
• With inflation easing in the last few quarters, the RBI has been gradually shifting to a growth-oriented monetary policy, though the focus on inflation is still quite evident. Further monetary easing will be contingent on the momentum of transmission of policy interest rates, normal monsoons and on developments in the external sector. Impending political, policy and economic developments will significantly influence the growth momentum and inflationary trends going forward.

The Indian debt markets still have a long way to go in attracting retail investors. Gautam Kaul, Vice President & Fund Manager – Fixed Income, IDBI MF shares with Saikat Mitra his views on the right strategy to invest in debt funds and the impact of macro-economic factors on the markets.

With respect to the Indian debt markets and Indian investors, how challenging do you find the fund management industry?

The defining feature of the Indian mutual fund debt space is that it has predominantly institutional participation. Traditionally, investor money has been concentrated in the money market space. In the last couple of years, long-term debt funds have been able to attract the attention of high net worth individuals (HNIs) and retail investors.

What is the difference between managing funds on the debt side and on the equity side?

The basic principles of fund management in both the equity and debt spaces revolve around finding value and delivering superior risk-adjusted returns. However, there is a significant difference in the approach to managing liquidity, as the debt markets lack wider participation and the desired depth.

Debt funds are not as popular as equity funds among retail investors. As a fund management house, what are you doing to popularise debt funds?

Investors in equity markets have realised the long-term nature of investment horizons and the risk-return matrix of the same. Due to the current volatility in the equity space, we find a growing interest of retail investors in the debt segment and are reaching out to them with products best suited to their risk appetite.

There have been rounds of talks about cuts in the key policy rates in the forthcoming RBI meet. What is your take on the interest front, and how do you see it panning out going forward?

With inflation easing in the last few quarters, the RBI has been gradually shifting to a growth-oriented monetary policy, though the focus on inflation is still quite evident. Further monetary easing will be contingent on the momentum of transmission of policy interest rates, normal monsoons and on developments in the external sector. Impending political, policy and economic developments will significantly influence the growth momentum and inflationary trends going forward.

What is impact that you see on bond yields of different durations (short as well as long) when the interest rates cool off?

We may see a further bull steepening of the yield curve, with short-term yields falling more than the long-term yields.

What is the right strategy to invest in debt funds, especially when the interest rates are falling?

Depending on an individual’s investment horizon and risk appetite, the right strategy to take advantage of falling interest rates entails investing in longer duration debt funds.
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The Indian bond markets have not developed as expected. What, according to you, has gone wrong and what steps should the government or the RBI take to develop them?

The lack of depth in the bond markets has resulted from the lack of a large variety of market participants with various motivations and the absence of longer-term, stable investors like insurance and pension funds.

There is also a paucity of retail participation due to awareness issues. Investors have traditionally equated debt investment only with fixed deposits and need to be educated about the advantages of alternative debt products.

Going forward, how do you see crude oil prices and gold prices panning out?

This is a global macro-event and is contingent on global liquidity conditions. If major central banks decide to withdraw or reduce liquidity infusion based on the strength of the global recovery, it will lead to pressure on commodity prices.

How fast do you think the government will be able to bridge the twin deficit gap?

Crude oil and gold are the two major contributors to India’s current account deficit (CAD). While the government and the RBI have taken strong steps to curb the import of gold, the demand for crude oil is fairly price-inelastic and is a function of domestic growth.

The recent rupee depreciation, being stronger than that in competitive currencies, will support exports in the near term. We believe that the CAD is unlikely to deteriorate further and will improve in the medium term as the rupee finds a new normal.

With regard to the fiscal deficit, the government has done a fairly good job to keep it under control. The Finance Minister has reiterated time and again that the deficit target for FY14 will not be exceeded. However, risks remain in the form of the Food Security Bill and the impending election year.

What is your take on the Euro zone crisis?

Even as the Euro zone economies limp to a sluggish recovery, ECB has sent a status quo message in contrast to the Federal Reserve’s indications of phasing out the monetary stimulus. While no news is good news, future developments depend on the success of fringe economies like Greece, Spain and Cyprus in meeting their bailout covenants.

How does this impact our markets, especially the bond markets?

The macro impact of a renewed Euro zone crisis will be that global markets go into a ‘risk-off’ mode, causing the flight of capital, spiking up of yields and tightening of liquidity.

What is your advice to investors in the Indian markets at this juncture?

Investors should stick to a prudent asset allocation arrived at in consultation with their financial advisors. The recent volatility across all financial and commodity markets should not alter their investment patterns. Global events and liquidity will continue to impact our markets, but they also provide opportunities for fund managers to build robust portfolios which can deliver superior returns.

(The author is Fund Manager – Fixed Income at IDBI Asset Management, and the views, opinions and expressions made are in his personal capacity).