Dhawal Dalal, Head–Fixed Income at DSP BlackRock Investment
Managers Pvt Ltd says that advisors and investors need to focus on high quality
and keep things simple for success in debt investments.
The central bank has not cut interest
rates this time. How do you see its impact on the debt market?
government bond yields to gradually move higher now that market participants
know that unless inflation comes down, the RBI will not be in a hurry to cut
rates. During this last policy meeting, most market participants were expecting
a 25 basis point rate cut on account of the decline in GDP growth. The GDP
numbers were significantly below what the RBI and the government were
most market participants believed that growth would take precedence. However,
the RBI’s decision to keep rates unchanged reiterates that inflation continues
to be the key priority. The RBI is of the view that India will have to
sacrifice some growth in order to bring down inflation. This will result insome
unwinding of the expectations of a rate cut.
Now that the RBI has not cut rates, what
should investors be doing? Which categories of funds look attractive at this
that bond yields are likely to remain range-bound with an upward bias, we are
of the view that investors should focus on short-term funds, FMPs and liquid
plus schemes which offer significant value with lower volatility. These funds
invest in short-term and medium-term money market and corporate assets. If one
looks at the current term structure of interest rates, we believe that these
funds are excellent investment avenues for an investor with at least a six
month investment horizon.
The industry has been witnessing redemptions
from gilt funds (Rs 371 crore in May and Rs 230 crore in April) in the last two
months. What is the reason behind this?
bond yields have been quite volatile since the beginning of the financial year
on expectations of more supply in the market and what was happening globally.
Most market participants did not expect the RBI to start open market operations
(OMO) in the firsthalf.
of supply pressure, market participants expected the benchmark 10Y bond yield
to inch up. Bond yields have come off now due to RBI’s OMO bond purchases.
However, they continue to remain volatile. As a result, some investors are redeeming
money from gilt funds.
Do you expect gilt funds to remain
volatile in June as well?
funds will remain volatile in June as well. We believe that gilt funds are
suitable only for sophisticated investors who understand the intricacies of the
government bond market, volatility in the prices and its impact on performance.
Many investors were expecting a rate cut in the credit policy on 18thJune
and were expecting government bond prices to appreciate after that. Since there
was no rate cut, government bond prices are trending down. We believe that
there will be some more outflows in this month as well.
Are you planning any new fund offer in
the fixed income space?
juncture, we are only focusing on hybrid FMPs and normal FMPs. We believe that
due to attractive equity valuations as well as elevated bond yields, investing
in hybrid FMPs makes good sense at this juncture.
Some fund houses have filed offer
documents for launching infrastructure debt funds. Would you also be looking at
contemplating this but have not made up our mind.
Given the uncertainty surrounding global
and domestic markets, do you think investors’ preference towards debt schemes
will continue even in 2012-2013?
investors are warming up to fixed income funds after seeing a volatile equity
market over the last couple of quarters. This raises the important question of
asset allocation in fixed income funds for a longer term. We now see a case for
investors to consider investments in debt funds just like the way they invest
in equity funds. In fact, we are now seeing investors investing in fixed income
funds for a longer duration than they were earlier.
Some experts are of the view that it is
the right time to invest through MIPs. Why and how much exposure should one
have in MIPs currently?
believe that the level of exposure in MIPs depends on the risk appetite of the
investor. Conservative investors can invest up to 20% of their portfolio in
MIPs. Investors with higher risk appetite can invest upto 35%. MIPs are a
stepping stone for investors looking for marginal exposure to equities.
Currently both equity markets and bond yields are at an attractive level.
Investors who invest in MIPs for one year are likely to generate good returns.
A recent CRISIL report stated that MIPs
(debt oriented hybrid funds) have outperformed their benchmarks over a five
year period. Does that make a strong case for investing in MIPs than investing
part of your money in a pure debt and a pure equity fund?
believe that rather than looking at the past performance of the fund an
investor should consider what these instruments are likely to generate going
forward. Everything ultimately boils down to the risk appetite of the investor.
MIPs make more sense for low risk appetite investors. Sophisticated investors
can consider investing in balanced funds.
Are MIPs only suitable in volatile
markets or are they all-season funds? How much exposure should one have to MIPs
irrespective of the market conditions?
a great time to invest in MIPs. For instance, currently one year yields are
slightly less than10%. Additionally, equity valuations are also attractive from
a forward looking P/E ratio perspective. So the combination looks good right
now. If bond yields are at around 6% pa and if equity markets valuations are expensive
from the P/E ratio perspective then it would not be a good idea to consider
investing in MIPs. We are now at a unique point where investors are looking for
asset allocation and bond yields and equity valuations are cheap.
Tell us something about the fair
valuation policy formed by DSP BlackRock.
of directors has directed us to form a valuation policy in line with the SEBI
directive. We have noticed that now all trades are reported on F-TRAC, a
reporting platform on FIMMDA. As compared to the past, we now know what is
trading in the market as far as money market assets are concerned. We are monitoring
these traded assets and if these assets are in our books then we are taking
into account the traded yields based on certain filters.
What is your outlook on gold?
tough call. We believe that the price of gold is inversely correlated with the
dollar. We observed that in the last leg of risk aversion which started in May
2012, the dollar has gained as most of the market participants have sold the
euro and other currencies and bought the dollar. As a result we have seen gold prices
trending lower. Currently, most of the market participants are long on the dollar
and short on other currencies which may be one of the reasons gold prices have
moderated. Whenever the unwinding of this trend happens, we believe it will most
probably push gold prices higher.
What issues are you grappling with in the
important issue is adherence to fair valuation because of lack of information
on what constitutes a fair value. The second issue is containing volatility as
investors are jittery due to higher volatility in the market.
Your advice to investors…
advice to investors is that they should invest in simple funds and keep an eye
on the credit quality. A recent CRISIL report says that default rates may be at
a 10-year high. One way to mitigate credit risk is by investing in high quality
assets. So our advice to investors is that they should study the portfolio of a
fund before investing in it and keep the liquidity high.