With the interest rate cycle expected to ease further, investors can get a good upside from longer duration funds with returns in the range of 9.5-10 per cent, says Amandeep Chopra, group president & head — fixed income, UTI Mutual Fund, in an interview with Vishal Chhabria. Edited excerpts:
On which side have you seen more flows, debt or equity?
We have seen flows largely on the debt side. Unlike a few quarters ago, when most of the money was coming in low-risk funds like liquid and FMPs (fixed maturity plans), money is flowing into longer-term funds. So, long-term bond funds, short-term income funds and dynamic bond funds have seen good amount of inflows.
So, has there been some kind of increase in risk appetite?
Yes, but it’s not as much about risk appetite as about people willing to invest for a longer term, and I think they are looking at adding duration rather than just sitting on pure accrual.
Funds like FMPs, which were very safe, secure and traditional products till the quarter ended June, are now winding down. Last year, we were pretty bullish on interest rates declining, so, that has kind of played out. There is still some more steam left, so, that should be positive for long-term debt funds. Investors who invested early in this cycle have made a good upside. Investors who are coming in now still have some upside to capture, but, maybe not as much as those who came in pre-March.
From the start of this year, what kind of returns have you seen and what kind of returns could be generated?
In the last one year, UTI Bond Fund gave a return of 11-odd per cent and short-term income fund gave 10.5 per cent. That’s been the band – of 10.5-11.5 per cent. Going ahead, I think you can see double-digit returns, but maybe not those levels, maybe just about high single digits to just about double digits, say about 9.5 to 10.5 per cent. But then, we, as fund managers, are always a little conservative in our outlook. The best FMP return was 10.4 per cent. So, we really outperformed.
Going ahead, I think a good upside will come from the longer-term funds, because the next phase which we see panning out is in rate cuts. So, in terms of risk returns, from a one-year-plus perspective, you could have maybe bond funds, then those interim dynamic bond funds, and then the short-term income funds, in that order.
Do you think RBI will wait for the numbers to start trending down?
Central banks will always sort of anticipate and see the trends and then act, because they always have to be a little bit more pro-active. So, if they have to cut rates, they will have to cut rates before the data actually starts trending down and there will be enough early indicators.
They will seriously start looking from December onwards. The January-March 2013 quarter could see rate cuts, which will be more driven by growth slowing down.
So, how are you positioning your portfolio?
In all funds, we have increased the duration. If you look at bond funds, we would be sitting on a duration of almost close to seven years.
In a shorter income fund we will have a duration of 3-3.5 years. These same funds, about six-nine months ago, would have had a duration less than half of what they have today.
In the interim period, we trade a little, because we have seen the markets offer trading opportunities and the markets have often become too exuberant or too optimistic, only to be disappointed. So, there will be some trading opportunities which we will be doing as well.
The corporate bond rally has also been fairly consistent and stable. We also believe, going ahead, there will be improvement in terms of the rating profile of corporates. So far, focus has only been only AAAs, lot of interest will come in the next tiers, which will be AA+, AA and AA minus category bonds. And we think that is where there is good opportunity. So, we are launching a fund now, to try and capture that, because the credit cycle seems to be bottoming out, which is evident from the corporate profitability trends.
Looking at the corporate point of view, when do you see the debt problem easing?
Any cyclical industry, where we see the cycle is bottomed down, some of the companies which are consuming imported commodities, which now hopefully with the price declining, will ease some of that burden, so their Ebitda margins should expand. That would be useful. So, one can look at some of the cyclical industries.
Other than that, one has to be very wary of over leveraged companies, because even today it would be very difficult for them to reduce leverage. Thirdly, you also need to see any industry which is prone to regulatory risks (like iron ore mining). One should avoid these and look at larger well-run companies.
