Killol Pandya, Senior Fund Manager – Debt, LIC Nomura
Mutual Fund says that the ticket size, accessibility and liquidity should be
good in order to attract retail investors towards inflation index bonds.
RBI will sell inflation index bonds soon. Is there room for mutual funds to participate in this market?
The details are not available yet. RBI is launching these bonds to divert investments from gold into these bonds. Importing gold is a drag on the economy. Gold is bought as a hedge against inflation. Hence, people are investing in gold. I believe this is not the only reason why people invest in gold. Historically, Indians have an affinity to stash gold physically. Going by that logic, the Gold ETF market has not grown rapidly as one would have expected because you are buying paper.
As far as mutual fund participation is concerned, this market should be made easily accessible. Its success will depend largely on the ease of participation and liquidity. In order to divert retail gold investments in these bonds, the ticket or lot size has to be small. If the ticket size is kept at, say, Rs 10 lakh it would be inaccessible to retail investors.
This market needs to have separate market makers to provide two way quotes. When RBI opened retail window in gilt market, Yashwant Sinha had bought gilt worth Rs 10,000. Today, no retail investor holds gilts.
It is not like equity market which is open to both institutions and retail investors. Mutual funds will be an ideal route through which retail money can be channelized in these bonds. Historically, both retail and institutional windows have not been successful on a single platform. There can be a separate platform for retail investors.
With the fall in WPI, do you think RBI will go for further rate hikes? How much of rate cut are you expecting?
Yes, I’m expecting a 25 basis points repo cut before July. RBI had outlined certain factors due to which the economy is driving into a bullish phase. They were lower inflation, stable and relatively lower international commodity prices which are impacting current account deficit and robust forex inflows which is assisting the rupee and therefore assisting the current account deficit.These factors are reversible. Crude prices can firm up anytime. Forex inflows which are driven by international events can dry up due to a variety of reasons. Inflation can get sticky if fuel prices go up. This is what RBI cautioned us against. It said there is little headroom for rate cuts.
I believe there is still headroom available before July. Once the hike in fuel prices percolate in the system over the next couple of months, it might lead to higher inflation. In such a scenario, the case for rate cuts will reduce. Then RBI will focus more on injecting liquidity in the system through cash reserve ration (CRR) cut or open market operations (OMOs).
Gilt funds have seen healthy inflows in the recent past. Would you suggest investors to consider investing in gilt funds at this juncture?
Since a rate cut is in the offing and RBI will try to improve liquidity both these factors bode well for gilt funds.Investors can park money for the short to medium term in gilt funds. Gilt market looks good till the next quarter.
Do you see the bond yields falling further from here?
People will dump old papers and buy new bonds which will keep the buying pressure. The yield could go till 7%.
Do corporate bonds and government securities papers offer good opportunity right now?
A corporate bond fund is a stylized income fund. PSU bonds have high liquidity. The play is not on the portfolio yield now. It’s a trade play. So fund managers favor PSU bonds which provide an exit opportunity.
What category of funds would you suggest to investors at this juncture?
I favour funds which have a maturity of three to five years. Different fund houses name them differently. Some may call it short term, medium term or an income fund having a five year maturity. Dynamic bond fund is an ideal product which gives the leeway to a fund manager to move across the yield curve. I favour PSU bonds over corporate bonds.
The DDT hike proposed in the budget will be implemented from June 1. How will it impact fund houses and investors?
I think investors should stay put. It is not a game changer. It does eliminate the advantage which mutual funds had over fixed deposits. But that doesn’t take away the benefits associated with mutual funds. It will not make FDs more attractive. It means your post tax returns will come down slightly. But the positive arbitrage still exists.
Should investors opt for growth plans of debt funds?
Growth option always existed. If investors had to avoid DDT they had the option to opt for growth plans even earlier.
Are there any new funds on the anvil?
We are in the process of identifying gaps where we can plug appropriate products across the segments. We’ll be a full suite product provider. We are also exploring to channelize Japanese investors money in India since Nomura is the largest asset manager in Japan. Japanese investors can actually lose money if they put it in bank account. So India provides a massive interest arbitrage.
