The Amtek Auto default has adversely affected the domestic mutual fund industry. Debt fund managers have turned extra cautious, as investors are raising concerns over the quality of holdings. Suyash Choudhary, head of fixed income, IDFC AMC, in an interview with Chandan Kishore Kant, says as a fund house, duration strategies, will get preference over credit risk-oriented strategies. Edited excerpts:
Has the recent Amtek default put pressure on debt fund managers?
Both credit and duration strategies are legitimate risks undertaken in pursuit of generating extra returns. The assumptions made at the point of initiating the trades might change over the life of the investment. Therefore, it is critical that the risk is manageable on an ongoing basis. This typically requires a well-functioning secondary market so that the risk can be added or sold. Or a reasonably robust derivative market where risk can be hedged. While such preconditions exist for duration trade, they don't do so as far as credit risk is concerned. So, once you assume a credit risk, it cannot be dynamically managed on an ongoing basis in India. The recent default episode has for the first time turned focus to the manageability of credit risk. We have always preferred interest rate risk or duration-oriented strategies over credit risk-oriented strategies in our funds.
As the market develops, the need for junk bonds will definitely arise. However, it would need to be backed by a secondary market or a derivative market where risks can be hedged. Also, investors into the fund will need to clearly understand and appreciate the nature of risk being undertaken in the fund.
Is it a good time to invest in debt schemes?
One should avoid looking at debt funds purely from a tactical perspective. An asset allocator will select debt funds in line with underlying risk appetite and use that selection to ensure steady income over a period of time. An added incentive in the current environment is that returns from fixed income funds are now beating inflation.
Within the debt category, what is more attractive?
Apart from the surprise 50 basis points rate cut, there are a few important takeaways from the recent Reserve Bank of India (RBI) policy review. The concern with respect to global growth and its potential to impact local prospects is now clearer. Also, RBI seems much more confident of government policies and there is a much closer co-ordination between the two. Thus, the central bank appears confident that the government will be able to accommodate the demands of the seventh pay commission next year without deviating from its deficit targets. Similarly, there is reasonable confidence with respect to public food management which seems embedded in RBI's CPI forecasts. Given the above and considering that the bond curve still offers a reasonable 'term premium' over the repo rate, we think government bonds continue to hold value for the long term asset allocator. Of course, not all investors have the appetite for the daily volatility. For such investors, a core portfolio can be built out of short- and medium-term funds that run conservative credit quality.
What would you recommend for investors looking to take short-term bets?
The spreads on the curve are still quite attractive given that the RBI policy remains open-ended in a dynamic world struggling with weak growth and low inflation. Hence, there is scope for some of these term spreads to come off as market becomes more comfortable with the trajectory of consumer inflation and continued government pro-activeness specifically around food and fiscal management. Investors should always make product selection on the basis of their individual risk appetite. Depending upon this, relative weights can be assigned to a portfolio of short and medium- term funds, on the one hand, and actively managed long duration oriented products on the other.
Has the recent Amtek default put pressure on debt fund managers?
Both credit and duration strategies are legitimate risks undertaken in pursuit of generating extra returns. The assumptions made at the point of initiating the trades might change over the life of the investment. Therefore, it is critical that the risk is manageable on an ongoing basis. This typically requires a well-functioning secondary market so that the risk can be added or sold. Or a reasonably robust derivative market where risk can be hedged. While such preconditions exist for duration trade, they don't do so as far as credit risk is concerned. So, once you assume a credit risk, it cannot be dynamically managed on an ongoing basis in India. The recent default episode has for the first time turned focus to the manageability of credit risk. We have always preferred interest rate risk or duration-oriented strategies over credit risk-oriented strategies in our funds.
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Do you think the regulators should allow investing in junk bonds?
As the market develops, the need for junk bonds will definitely arise. However, it would need to be backed by a secondary market or a derivative market where risks can be hedged. Also, investors into the fund will need to clearly understand and appreciate the nature of risk being undertaken in the fund.
Is it a good time to invest in debt schemes?
One should avoid looking at debt funds purely from a tactical perspective. An asset allocator will select debt funds in line with underlying risk appetite and use that selection to ensure steady income over a period of time. An added incentive in the current environment is that returns from fixed income funds are now beating inflation.
Within the debt category, what is more attractive?
Apart from the surprise 50 basis points rate cut, there are a few important takeaways from the recent Reserve Bank of India (RBI) policy review. The concern with respect to global growth and its potential to impact local prospects is now clearer. Also, RBI seems much more confident of government policies and there is a much closer co-ordination between the two. Thus, the central bank appears confident that the government will be able to accommodate the demands of the seventh pay commission next year without deviating from its deficit targets. Similarly, there is reasonable confidence with respect to public food management which seems embedded in RBI's CPI forecasts. Given the above and considering that the bond curve still offers a reasonable 'term premium' over the repo rate, we think government bonds continue to hold value for the long term asset allocator. Of course, not all investors have the appetite for the daily volatility. For such investors, a core portfolio can be built out of short- and medium-term funds that run conservative credit quality.
What would you recommend for investors looking to take short-term bets?
The spreads on the curve are still quite attractive given that the RBI policy remains open-ended in a dynamic world struggling with weak growth and low inflation. Hence, there is scope for some of these term spreads to come off as market becomes more comfortable with the trajectory of consumer inflation and continued government pro-activeness specifically around food and fiscal management. Investors should always make product selection on the basis of their individual risk appetite. Depending upon this, relative weights can be assigned to a portfolio of short and medium- term funds, on the one hand, and actively managed long duration oriented products on the other.