What is your near to medium term outlook on the shorter end of the yield curve?
Given limited efficacy of incremental rate cuts with slowdown in overall credit growth, incremental policy focus will be on use of unconventional tools to ease financial conditions and push for faster transmission of past rate cuts. Resultantly, liquidity is likely to remain abundant over the next few quarters which will keep the shorter end of the curve anchored to repo rates over short to medium term.
Take us through some of the key driving factors that would help short term funds?
In the current macroeconomic backdrop, RBI is looking to create a low volatility environment with excessive liquidity to nudge financial markets and banks to start a new credit cycle. Policy rates are likely to remain stable and abundant liquidity will keep ultra short term spreads compressed. Thus, the yield curve is likely to remain steep over medium term. In such a scenario, short term funds, which invest core part of their allocation in 1-3 year segment, would provide stable accrual opportunities to investors.
Going forward, how do you see short duration strategies perform as against medium and long duration debt funds?
Easy gains of duration are behind us now. Higher fiscal supply and past experiences of rates at these levels continue to be overhang for longer end of yield curve to come down. Strong communication by RBI to keep rates “lower for longer” is keeping interest rate curve stable at current levels. Given there is general consensus evolving on using fiscal space more aggressively from here on, elevated inflation numbers and better growth prospectus than anticipated earlier, from balance of risks argument “ short term funds” are likely to give better risk adjusted returns.
Do you see room for more rate cuts by RBI? In this regard, how should investors play the duration risk?
One cannot rule out another 25bp rate easing in case growth normalisation surprize policy makers on downside. But we see that to be less probable scenario. Our base case is that we have reached to bottom of rate easing cycle by RBI. Abundant liquidity is “new normal” and will remain so in system at least for next one year. Thus, short term curves (1-3year) are better place to invest for incremental allocation.
How should investors design the core part of their debt portfolio at this point?
1-3 year segment as cash deployment strategy with focus on enhanced accrual by investing in good quality credit papers.
Both ABSL Short Term Fund and ABSL Low Duration Fund have outperformed their benchmark over the last 6 months, 1-year and 3-year time. What are the factors that have worked for these funds?
Focus on credit quality, agile management of duration and liquidity strategy has worked well for both funds.
Who should invest in ABSL Short Term Fund and ABSL Low Duration Fund? What should be the investment horizon?
Anything more than 3 months for Low duration funds and more than 1 year for Short term fund
Tell us about the investment strategy for both these funds. And how these schemes are different from other funds in their category?
Core portfolio is passively invested taking into our understanding of various macro economic variables such as growth, inflation , politics. This part of the portfolio is usually invested with medium to long term horizon. Satellite portfolio is actively managed taking into valuation opportunities available in market. While investing various constrains as specified by SEBI and internal risk committee are adhered to according to mandate of fund.
Why should advisors recommend these funds to their clients?
Taking into account ‘balance of risk and return trade off’, they are best placed in current scenario.
