In an interaction with Sabyasachi Mukherjee of IIFL Wealth & Asset Management, Amit Somani remarked, “The current interest rate cycle, unlike earlier ones, seems to have bottomed out without accompanying improvement in overall economic credit quality. Thus, lower duration products focusing on income from accruals, without diluting credit quality, offer better opportunity than duration products in the medium term.”
Excerpts of the conversation...
What are your views on fixed income market in India? How do you foresee yields moving in near to mid-term and why?
The change in monetary policy stance to neutral from accommodative and RBI’s continued thrust on maintaining CPI inflation at lower levels, indicates that interest rates have bottomed out in the current cycle. Bond yields are expected to have a stable to upward bias as the Indian economy remonetizes and growth concerns fade. CPI inflation is expected to move up due to the implementation of 7th Pay Commission allowance, increase in minimum support prices and upward pressure from global commodity prices. However, FII flows and insurance demand is expected to be strong which should support bond yields.
With yields inching higher across the globe, what’s your expectation for the global fixed income market?
Globally, yields across developed markets have moved higher over the last few months as growth picked‐up along with improved expectations, commodities and crude holding on to price gains, talks of fiscal stimulus gaining importance, and Central banks normalizing past expansionary policies or having given up the earlier expansionary stance. The trend in global fixed income market is likely to sustain so long as the above parameters remain at work.
Do ultra-short term MFs provide more opportunity than duration funds in the present scenario?
Given our view of stable to upward bias on interest rates, we have brought down the duration of funds around lower range of the band. The current interest rate cycle, unlike earlier cycles, seems to have bottomed out without accompanying improvement in overall credit quality in economy. Thus, lower duration products focusing on income from accruals, without diluting credit quality, offers better opportunity than duration products in the medium term.
According to you, which part of the yield curve looks attractive for investments?
The short‐term curve supported by easy liquidity in the banking system looks attractive, with stable to upward bias on interest rates in medium term. Investors should take advantage by moving to lower duration products which focuses on income from accruals while protecting capital.
Given surplus liquidity in the system and government expected to buy back 750bn of stock this fiscal, how would the yield get affected in the near term?
Liquidity is likely to remain in surplus throughout the current fiscal year considering the deposit mobilization post the ban of SBNs. The GOI buyback program would support the short‐term rates, when executed. This would augur well for short‐term rates in near term.
What kind of debt funds would you recommend at this point of time, for holding period of up to one year/ above 3 years?
We recommend funds with focus on generating income through accruals, as the upward bias on interest rates yet remain. Ultra‐short term or ultra‐short term plus fund are suggested for investors with holding period around one year, while short or medium‐term fund is for investors having holding period around three year or above.
Tata Corporate Bond Fund is positioned around the lower duration spectrum with focus on accrual as well as credit quality. The fund would generate accruals by taking exposure to short‐term corporate bonds of high quality issuers.
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