What is your medium term outlook on debt market?
After a series of covid-19 led rate cuts last year, Indian policy rates have remained unchanged over the last few quarters. RBI was amongst the initial few central banks which commenced the policy normalisation process in early 2021 but the Covid-19 second wave seems to have put the normalisation process on hold. We now expect the RBI to restart this process from the October-December quarter.
Since the normalisation process will now be slower than earlier envisaged, we see this as a positive development for the short/medium end of the yield curve. The long end is largely being influenced by the government's expansionary fiscal stance and the medium term fiscal consolidation path. RBI actions last financial year and especially since February 2021 speak louder than words. Introduction of defined quantitative easing programmes along with on-going open market operations (OMOs) give us the comfort that this year long bond yields are likely to trade in a range not too different from levels seen in the first quarter of 2021.
To sum up, we feel the current term structure is well placed to absorb the gradual normalisation process of the RBI.
What are the key risks and triggers for the debt market?
Global bond markets are currently in a reflation trade environment, where negative inflation and growth prints last year are leading to mechanical and outsized positive data releases this year. Central banks across the world remain convinced that these outcomes are likely to be transitory; however the possibility that these results become entrenched remains a risk. Such conditions may force central banks in advanced economies to change their current accommodative stance earlier than expected, and this would in turn force the hands of emerging economies like India.
Why should MFDs recommend this scheme to their clients?
ITI Dynamic Bond Fund is our latest offering and is positioned as a total return bond strategy. The fund expects to deliver optimal performance through both accrual as well as capital appreciation by active duration management and allocation across fixed income asset classes. The allocation to various maturity bond buckets will be based on the fundamentals and top down view on various macroeconomic parameters including expected interest rates, inflationary scenarios and other market conditions. The fund will endeavour to deliver strong risk-adjusted returns across all bond market scenarios through a flexible fixed income approach.
Based on my last 25 years of experience in capital markets, I strongly believe, at this juncture there is a significant opportunity in front of us to create an all-weather bond fund which can be a strong investment case for anyone who wants to put money in fixed income segment.
In that sense ITI Dynamic Bond Fund is a perfect solution for all types of fixed income investors and therefore we believe it is a timely product from ITI Mutual Fund. This is a debt product where an investor can put money at all point of time with a long term horizon and also not bothering about the interest rate scenarios prevailing in the markets.
Dynamic funds are considered to be riskier than most categories of debt funds. What are the risk mitigation strategies that you will deploy in the fund?
I am not sure that I can fully subscribe to the view that dynamic funds are riskier that most categories of debt funds. Dynamic debt funds are long term investment products and they should be looked from that perspective and it is not fair to compare apples and oranges. Debt funds have had to navigate considerable challenges last few years, and these events have highlighted the importance of liquidity and flexibility across time. This is the idea behind ITI Dynamic Bond Fund
The SQL philosophy is the core investment philosophy of ITI Mutual Fund where 'S' stands for Safety, 'Q' for Quality of the business, and 'L' for Liquidity. The fund will follow the 3 pillars of our investment philosophy by pre-dominantly investing in sovereign debt instruments and topmost rated securities which meet our stringent investment guidelines.
We have a very high quality threshold which needs to be adhered to while buying a bond and this is going to be one of the key differentiating factors from the rest of the funds in the category. The other main differentiation would be that we would be deploying a dynamic fund management strategy in true sense where liquidity will be the key driver. Another point where this fund will score is that we are not going to play credit or perpetual bonds or regulatory defined bonds with special features which according to us is not worth considering in a flexible bond strategy like ours.
Currently, many debt funds are delivering at par returns with bank FDs. In such a scenario, why do you think that investors should invest in fixed income funds?
We are confident that ITI Dynamic Bond Fund would be a great value add for an investor and has the potential to beat inflation on a 3-5 year basis. Furthermore, the tax efficiency of debt funds is an added advantage.
