Though the central bank kept key rates unchanged in its recent mid-quarter monetary policy but signals of focus on growth further fuelled expectations of immediate rate cuts early next year. Debt funds, which of late, have witnessed rising interest among investors would emerge as one of the beneficiaries of rate cuts. Amit Tripathi, who recently took over as head of fixed income at country's second largest fund house Reliance Capital Asset Management, says adding duration to portfolios will benefit investors amid current scenario. In a conversation with Chandan Kishore Kant, he says government securities and triple 'A' PSU bonds look the most lucrative. Edited excerpts:
Post-Lehman crisis debt mutual funds have found interest among investors which is on the rise recently. How is the scenario changing?
Interest and awareness among investors for debt funds is on the rise. Now, how much of it has to do with money moving out of equity funds and coming to debt, that I may not know. People are looking at asset allocation much more closely in the last 4-5 years, which I understand has resulted in higher interest in debt category. And lot of it, which earlier was restricted to fixed maturity products (FMPs), has now started diversifying into open-ended schemes too. Monthly Income Plans (MIPs), for instance, has generated huge amount of retail participation; the dynamic bond funds are another product category which has seen investors stepping in. So, it means a rising trend of debt allocation.
Currently, equity markets are only ten% away from their historical peaks. Does it make sense for investors to continue with their investments in fixed income products amid hopes that equities may rebound?
The broader issues which we need to address is asset allocation. Irrespective of the time period you are looking to invest for, there has to be a basic asset allocation one should do in the background. Today, in an environment where we have seen interest rates broadly peaked out and over the next 12-24 months we are likely to see a gradual drop in rates, it makes sense for the investors to add duration to their portfolios.
How would adding duration help investors?
If investors do not have any duration in their portfolio they should try and add duration first. That's my first advice. If investors come in an all whether fund, automatically durations are added to their portfolios when the general environment is such that interest rates will come down. The fund will itself manage duration pro-actively to make money when the going is good and preserve capital when in adverse situation as far as the rates are concerned. I think from a retail investor's perspective, these are the products one should be concentrating on which actually are used as more like a debt allocation rather than purely a timing or interest rate strategic kind of a product.
Gilt funds have seen rise in retail folios as well as inflows. How do you see gilt funds doing going forward?
Because there is an expectation that interest rates will go down, more people are coming to gilt funds. Gilts give you the maximum credit comfort as they are the least credit risk products or zero credit risk product. But obviously gilt funds run interest rate risks. If the interest rate actually falls as per the expectation, you make higher returns and if they do not fall and they rather rise then you lose out in terms of capital depreciation.
Amid high rate cuts expectation early next year, how are you positioning yourself in terms of your investment strategy?
As on today, obviously with the expectations that interest rates are likely to decline, one would like to be over-weight duration. And when you want to be overweight duration, higher allocation will go into assets like government securities and Triple "A" PSU bonds among others. These not only provide you a duration exposure but also they are fairly liquid for you to manage that duration efficiently.
Is there a degree of caution you are maintaining? In case things don't change as per the expectation, then what?
All of us understand that there is lot of flux in the macro environment - domestic or overseas. And while the broader view is that rates will go down; when you are implementing a duration strategy you should implement this strategy through the most liquid instruments. If unlike expectations interest rates move up, or it does not move down to that extent how you protect yourself? The way you protect yourself is by staying in the most liquid instruments which you are running durations so the duration part of returns will be delivered as long as interest rates move down. But by remaining in liquid instruments you are ensuring that in an eventuality where it does not play out the way it has currently been envisaged you can come out of it with the least impact cost. So remaining invested in the most liquid of the category is important.
What would be your advice to investors who are looking at debt funds for the first time?
FMP is the best entry level debt product for any investor who is wanting to come to debt mutual funds. This product is the easiest to understand and does not carry any interest rates risk other than the opportunistic cost of investing now vis-a-vis three months down the line etc. This product can be explained easily at the retail level. There is a degree of sophistication which is required when you are looking at any financial investments, which in case of FMPs is much lesser. Moreover, lot of risks which were perceived to be associated with FMPs have also gone out. It's a simple and good product for entry level investors and is tax efficient too.