R. Sivakumar, Head of Fixed Income, Axis Mutual Fund

Sarika Kodag, IIFL | Mumbai | July 14, 2016 10:43 IST

“The global environment is faced with the challenges of Brexit, China devaluation and European banking stress.”

R. Sivakumar, Head of Fixed Income, Axis Mutual Fund
R. Sivakumar, Head of Fixed Income, Axis Mutual Fund, has over 16 years of experience in the Indian asset management industry across asset classes. In his current role, Sivakumar is responsible for managing the entire Fixed Income investment team, process and performance. Prior to this, he was managing fixed income funds with Sundaram and ABN AMRO Mutual Funds.
 
Axis Mutual Fund launched its first scheme in October 2009. Since then Axis Mutual Fund has see robust grown. The company attributes their success to their 3 founding principles - Long term wealth creation, outside in (customer) view and long term relationship. Axis MF aims to provide quality financial and investment solutions which help customers feel financially secure and confident of a brighter and prosperous future.
 
Replying to Sarika Kodag of IIFL, R. Sivakumar says, “The global environment is faced with the challenges of Brexit, China devaluation and European banking stress.”
 
Share your views on the debt capital market in India and your assessment for the year 2016-17?
With RBI having already delivered 150 bps of rate cuts, we believe we are close to the end of the rate cycle. The focus of the central bank has also shifted to provision of liquidity to ensure transmission of rates. The yield curve shows a large positive slope relative to the flat curve that existed 1 year ago. This steepness is presenting an opportunity in the 3-5 year corporate bond segment. While further policy rate cuts are likely limited, better transmission and changed liquidity stance, should lead to lower market rates over the next 12 months.

Comment on the current market situation and how Brexit will influence the Indian market going forward?
The global environment is faced with the challenges of Brexit, China devaluation and European banking stress. In this environment, we expect commodity prices to remain in check which will help keeping a lid on inflation. We do not believe FPI outflows to be a key risk for Indian bonds as the ownership by foreign investors is small. To the extent that global events have an impact, we expect this to be temporary and the markets will eventually react to domestic macro.

What is your outlook on interest rates? How will they affect returns of debt funds over the next one year?
The key development with respect to rates in India has been the amendment to the RBI Act mandating CPI inflation as the key indicator for RBI. Thus, we believe that the Reserve Bank will maintain policy with a view to keeping inflation in the range of 4% +/- 2%. In practice, as inflation remains above 5%, the space available for rate cuts is reducing. We believe that RBI may yet be able to deliver 25-50 bps rate cuts in the current environment. The RBI has therefore shifted away from rate cuts to focusing on transmission of rates through addition of liquidity to the markets. This liquidity addition is expected to benefit the short end of the yield curve. Thus we believe that short term bonds and money market instruments are best placed to take advantage of RBI actions.

Which segment of the debt market looks attractive with a twelve-month horizon?

As mentioned earlier, the steepness in the yield curve is presenting an opportunity in the 3-5 year corporate bond segment.

According to you, what should be asset allocation when it comes to debt funds? What kind of a combination do you keep in your debt portfolio?
Asset allocation has to be decided by each investor based on their risk profile and investment objectives. Having said that, debt funds should form a core part of most asset allocation portfolios. Depending on investor objectives, investors can select between short term funds, income funds and dynamic bond funds.

What is your strategy for both short-term and long-term bond funds?
With the RBI having already delivered 150 bps of rate cuts, we believe we are close to the end of the rate cycle. The focus of the central bank has also shifted to provision of liquidity to ensure transmission of rates. In this environment, we expect the money and short term curve to outperform relative to long bonds. As such, we have been reducing the duration in our fixed income schemes. At the same time, we are maintaining high credit quality across our portfolios. The economic cycle is showing early signs of recovery, but the financials of some companies remain weak - especially in stressed sectors such as steel or real estate.

What risk mitigation strategies have you adopted to shield your portfolio?
The key risks when it comes to fixed income are volatility, credit and liquidity. Volatility can be contained by keeping a strict watch on portfolio duration. Credit risk is not well understood and lower rated bonds appear to be less risky as they are infrequently traded (hence they appear to be less volatile). At Axis Mutual Fund, we are very watchful about credit risk - firstly by maintaining a high proportion towards high quality assets (including government bonds and money market instruments) and secondly by ensuring adequate diversification in the non-AAA names. Liquidity in Indian markets is correlated with credit risk. That is to say high quality bonds are also typically the most liquid. By maintaining a high allocation towards government securities, money market instruments and AAA rated bonds, we ensure liquidity of the portfolio.

Among the various debt funds of different tenures, which ones are more popular with retail investors?
Debt funds are still not so well entrenched with retail investors. Informed investors or those investors that work with financial advisors typically make allocations to debt funds. Over the last few years, we have seen investor preference shifting from close-ended FMPs to open-ended products - especially in the short term space.

What is your advice to retail investors on investing in debt funds?
Investors should understand the risk-reward relationship when investing in any fund. Investors with the ability to take short term volatility and having a longer holding period should consider dynamic/income funds. While those seeking low volatility should consider ultra-short or short term funds. It is also tempting to invest in funds having the highest yields in their portfolios. But just as corporate FDs offer higher yields than bank FDs because of the higher credit risk, funds having higher yields also tend to have higher credit exposures. This should be kept in mind while choosing allocation across low and high risk products.

 

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