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Uncertainties around interest rate, inflation and other global events continue to exist. Considering these events, what is your near-term outlook on the debt market?
Uncertainties are part and parcel of markets and currently, these uncertainties have increased due to the challenge of unprecedented multi-year high inflation complicated by geopolitical events. Our investment decisions are bound by the underlying fundamentals, guided by our investment philosophy “Protect Capital and Grow Income” and are optimised for delivering risk adjusted returns to investors. In the current context, after the aggressive and front-loaded rate hikes by central banks across the world including the RBI, we believe that the current rate hike cycle will peak out in the next two quarters and we are positioning our portfolios accordingly.
Why do you think that debt funds will make a strong comeback from here?
Markets move in cycles and after the aggressive and series of rate hikes by central banks across the world including RBI this year, we expect the rate cycle to turn and expect inflation to cool off next year. In fact, the yield curves have become flat to inverted and thus the market is also signalling inflation to come down and also rate cuts to happen in response to slowing economic growth by the Q3 of CY23. Thus, we believe that debt mutual funds are poised to make a comeback next year.
Barring credit risk funds, all other debt categories have given less than inflation returns in 1 year, 3 year and even 5-year period. Hence, many distributors have shifted their focus to other products like P2P lending, NCDs and invoice discounting. In such a scenario, why do you think debt funds deserve a place in clients’ portfolio?
We strongly believe that debt funds will make a comeback next year as policy rates and yields stabilise after aggressive hikes this year. The rate cuts and liquidity infusion done after COVID 19 led to lower returns for fixed income investors over the last couple of years. The rate hikes seen this year along with the accompanying rise in yields will improve the returns for fixed income investors going forward. The current yields are giving a positive real rate of return over the current and expected inflation and thus, we believe that going forward, fixed income investors will get much better returns compared to the last couple of years both in real and nominal terms.
Over the past two years, majority of inflows in fixed income funds has shifted to target maturity funds. What is your take on this new asset category which is rapidly getting popularity? (Is this a fad or opportunity)
Target maturity funds are passively managed funds which invest in a certain segment of the yield curve which can be across fixed income asset classes. Target maturity funds are better than FMPs in the sense that they are open ended unlike FMPs and they also have a defined investment horizon just like a FMP. We think target maturity funds are definitely a good opportunity for investors as they are transparent in terms of the investment strategy and time horizon. They are good for first time investors and also those investors who are looking for asset liability management.
What is the fund management philosophy of PGIM India Mutual Fund for fixed income funds. How it is different from others?
Our fixed income investment philosophy is to ‘Protect Capital and Grow Income’. Debt investors do not like surprises and volatility and our philosophy underlines, safety first and downside protection at all times.
We focus on fundamental analysis and follow a relative value framework for asset allocation and security selection while emphasising on risk management and diversification.
We have a robust system of internal credit ratings which is based on in house financial ratio analysis model. We look to generate alpha through our duration calls while being conservative on credit selection, where we ensure downside protection.
In terms of differentiation, we would say that we are very transparent with respect to our funds positioning and communication. We are currently, the only fund house, which discloses portfolios on a daily basis across the money market segment viz liquid fund, ultra short term fund, low duration fund and the money market fund.
What are the risk mitigation strategies that you have implemented in your funds?
We have a robust system of internal credit ratings, which is based on in-house financial ratio analysis model. We also have limits on single issuer and sectoral exposure according to our internal ratings. Besides, we have synergies across the equity and credit research teams as part of our investment process which helps in encompassing different views and ensures overall risk management.
There are 16 categories in debt funds. Tell us which are the three categories of debt funds that can address most financial needs of clients. Why do you think having these funds are good for them?
We think that most of the financial needs of investors can be met by investing in the following three categories of debt funds:
- Money market funds: This category of funds invests in up to 1-year duration segment and investors can invest their short-term surpluses in this category as it generally has lower volatility and can provide better after-tax returns compared to other short-term saving instruments such as bank savings account. These type of funds include liquid fund, ultra short term fund , low duration fund and money market fund.
- Short term funds: This category of funds generally invests in 1 to 4 years duration segment. Short term funds can address the medium-term investment needs of an investor. These types of funds include banking PSU funds, corporate bond funds and short duration funds
- Dynamic bond funds: This category of funds can invest across the curve. Dynamic bond funds will endeavour to capture interest rate cycles and can be used as a long-term investment vehicle by investors.
We believe that the above three categories of funds can solve most of the debt investment needs of an investor. Please note that the above fund categories are not as per SEBI categorization and have been combined for better understanding.
