Raju Sharma, Head - Fixed Income, Indiabulls Mutual Fund says that investors should invest in long term FMPs to get better post tax returns.
Will gilt funds continue to gain traction in 2013 as market participants are expecting a further rate cut in April?
Mutual Funds are experiencing good amount of traction in duration fund segment in general and gilt funds in particular, due to increasing optimism over the RBI cutting rates, which would help the investors in these funds to profit from capital appreciation. We believe that given the growth inflation trajectory, the interest rate is set to come down in the next few months. This may further trigger rally in long duration sovereign bonds. However, there could be some amount of volatility, which investors should be prepared for.
What is your outlook for the fixed income market for 2013?
Our outlook for the fixed income market for 2013 is positive due to a host of factors like slow growth, moderating inflation, government’s resolve to contain the fiscal deficit and address issues relating to current account deficit and RBI policy increasingly veering towards stimulating growth by cutting interest rates during the current year.
RBI has cut the policy rates by 25 bps in its recent 3rd quarter review, as promised in its last review. However, it has also sounded bit hawkish in its guidance, stating that the room for further monetary easing is limited given the high fiscal and current account deficit. While it cut its March-13 inflation expectation at 6.8% from its earlier estimate of 7.5%, due to softness in the WPI numbers in the recent months, it has stated that the inflation for the next year is likely to remain at current levels.
We believe that, the trajectory of policy rates going forward is easing, and we expect further easing of the magnitude of 50-75 bps in FY14. However, the trajectory of the rate cut would be non-linear one, given the constraints of high current account deficit and fiscal deficit. Our optimism on the further policy easing stems from the series of policy actions taken by the government.
The government has off late been addressing the issues of twin deficit. While it has hiked the import duty on gold, it is also taking the necessary steps in containing fiscal deficit. While the government is preparing to cut the expenditure to the tune of Rs.1 trillion, it is also taking steps to contain the subsidy burden, which has been the main source of fiscal slippage. Among these measures, the steps to partially deregulate the diesel prices by allowing OMCs to raise the diesel prices in a phased manner, restricting the number of subsidized LPG cylinders are of significant importance in reducing the all important subsidy burden.
These measures should enable the government to cap the deficit for the current fiscal at 5.3% and target even lower number at 4.80% in the next fiscal. This should encourage RBI to respond by cutting rates.
Will FMPs/income funds continue to form a major part of fund mobilization for AMCs in 2013?
Given the higher level of interest rate for money market securities due to financial year end closure and tight liquidity in the system accentuated by the sharp cut in government expenditure, there will be enormous investor interest for long term FMPs during the month of February and March 2013. Investors will also benefit from indexation from these FMPs. However as the FY13 closes, the investor interest will wane due to softening of money market yields from April onwards on account of easy liquidity and government spending.
However Income fund will continue to attract investors as the yields will come down by 25-50 bps because we expect further cuts during the rest of 2013.
What kind of products are you planning to offer on the fixed income side?
We have started our operations in October 2011. So far we have launched Indiabulls Liquid Fund, Ultra Short Term Fund, FMPs and Gilt Fund in Fixed Income category and Bluechip Fund on equity side.
Our Indiabulls Income Fund is already open from February 12, 2013 and will close on February 26, 2013 and we hope to receive good response from the investors.
On the fixed income side we are planning to launch more long term FMPs and Short Term Fund very shortly. With this we will be able to offer the entire range of fixed investment products to the investors.
What are your expectations from the budget?
We believe government will continue with its reforms , measures and will provide a growth oriented responsible budget. It will provide a roadmap for roll out of Goods and Services Tax (GST) and will further try to contain fiscal deficit by reducing subsidies and other wasteful expenditure.
Inflows in gold funds have slowed down in 2012 compared to 2011. Where do you see gold heading in 2013? Do you see a moderation in the demand for gold after government’s efforts to curb its imports?
Gold has been under some pressure in the recent months, triggered by market concerns of an earlier-than-anticipated tightening in U.S. monetary policy. It is presently trading in a broad range of $1650-1700. Though it has delivered a positive return in rupee terms in the last 1 year, thanks to rupee depreciation, in US$ terms, gold has delivered a negative return in the last 1 year ( -2.76%). We believe that the very low nominal interest rates, an ongoing commitment to QE3 will attract investment buying of gold, despite elevated prices. Though government has recently hiked import duty on gold and it should have marginal impact.
Where do you see bond yields heading in the near and long term?
We expect the bond yields to trade much lower than the present level of 7.85% (benchmark 10 year G Security). In the near term it should trade lower end of the range of 7.75% to 7.95% and expect it to go down below 7.50% in the long term.
What would be your advice to investors?
We recommend investors to go for long duration products to gain from benign interest rate scenario. We would also advise investors to allocate some amount for long term FMPs to have better post tax return since the money market rates are at attractive levels.
