How do you think the Greece situation will impact our markets?
Greece situation is as much political as financial. Now with the Greek population rejecting austerity proposal, it is unclear as to how EU will aid Greece or whether Greece will exit EU and have a currency of its own. Both ways, the markets will continue to remain volatile till the situation is resolved.
As far as impact on India is concerned, we are not directly impacted by Greece as our banking system does not have any significant exposure to Greece. On the markets side, global volatility will have impact on Indian markets also. In case there is a major risk-off trade globally, we might see some outflows from emerging markets including India, and hence see some sell-off. But the impact on Indian markets is expected to be short lived and limited.
Are you still seeing interest in gilt funds?
G-Sec yields are almost where we started six months ago prior to rate cuts. This means that the curve itself is priced cheaper. The reasons have been global volatility and not so bullish RBI commentary in the monetary policy review.
Some investors who have higher risk appetite both in terms of volatility and time, are looking at gilt funds again. The generic stance is that RBI’s fight against inflation will result in inflation coming down over a period of time. This will create space in monetary policy to ease. The only question remains to be answered is when. To that extent, we expect global volatility to subside over the next six months (Greece issue to be resolved one way or other and Federal Reserve lift-off to be clearer). There will be some clarity over the next six months on the impact of monsoon on food prices and levels of crude price stability. Hence some investors are looking at gilt funds.
What is your advice to investors who wish to invest in debt funds at this juncture?
Volatility will be order of the day for the next 3-6 months. So investors looking to invest in debt funds should be clear that their investment horizon has to be greater than one year for higher probability of generating decent returns. As discussed above, there is a high probability that interest rates will come down gradually over a period of time (as inflation comes down), and hence one can look to invest across debt funds especially as the curve is priced much cheaper than 3-4 months ago. Investors with longer holding period (2 years or so) with higher risk appetite can look to invest in longer duration funds, else short term funds can be looked at for 1 year kind of investment horizon.
How are you going about managing your dynamic bond fund at this juncture? What kind of paper and tenure you are investing in?
We are keeping very liquid portfolio in dynamic bond fund. About 60% to 75% of allocation is towards Government Securities and rest in high quality corporate bonds. We had reduced exposure to very long end of curve (15-30 year g-sec) as we had anticipated that there will be significant steepening of the curve, and invested in 5 year–10 year segment. As of now, with global bond rout and significant hardening of yields, we believe that curve is reasonably priced and one can look at increasing duration. However, global volatility is expected to stay and hence we are running relatively lower risk, both in terms of interest rate risk with lower duration and credit risk with only highly rated corporate bonds. This adds to agility and liquidity to the portfolio.
Is a dynamic bond fund an all seasons fund?
The investment landscape and limit structure makes dynamic bond fund very flexible and suited to operate in different market situations. The fund can increase duration to capture gains in falling interest rate cycle and decrease duration to earn accruals in rising interest rate cycle. Having said this, one has to bear in mind that the interest rate cycles life tenures can vary. Hence the fund will operate accordingly. So dynamic bond fund can be a form of all seasons fund for investors with longer holding period.
How have the changes in taxation of debt funds impacted your debt business? Are you still launching FMPs?
Yes it’s true that the changes in taxation of debt schemes has impacted our business in terms of slowdown in appetite for debt schemes, especially closed end debt schemes. However, the same is in line with the industry trends. FMP launches by us and in the industry have slowed down. Additionally, we are focusing more on 3 year FMPs compared to 1 year FMPs due to changes in taxation and resultant change in investment demand.
Many fund houses have launched arbitrage funds recently. Are you planning to launch arbitrage fund? Do you think arbitrage funds have enough opportunity in our market?
As of now, we are not contemplating to launch a pure arbitrage fund. However, we are in the process of re-structuring Tata MIP Fund as Tata Regular Savings Equity Fund which seeks to use arbitrage as part of investment & asset allocation strategy.
