Vikrant Mehta, Joint Head – Fixed Income and Head – Macro Strategy, Indiabulls AMC

Mutual Funds form an important part of financial intermediation, and credit risks are inherent to this process.

Jul 25, 2019 04:07 IST India Infoline News Service

Vikrant Mehta
Vikrant Mehta, Joint Head – Fixed Income and Head – Macro Strategy, Indiabulls AMC, has 24+ years of fixed income and emerging markets experience across fund management, macro research, trading and sales. Prior to joining Indiabulls AMC, he worked with PineBridge Investments, where he was the Head of Fixed Income at PineBridge India AMC. Subsequently Vikrant was a sovereign rates and currency specialist for Asia, in his role as Asian sovereign analyst with PineBridge. His other work assignments have been with NVS Brokerage, JM Morgan Stanley and Mata Securities. He is an M.S. in Engineering and a CFA from The Institute of Chartered Financial Analysts of India.
 
In an interview with Shweta Papriwal, Editor, indiainfoline.com, Vikrant Mehta, said, “In the current context, the RBI changed its stance to accommodative in June 2019 and thus any further policy rate cuts could lead to duration funds outperforming FMPs or accrual funds in the near/medium term.”
 
What are your views on overall fixed income market post budget?
The headline budget numbers led by the fiscal deficit, gross and net government borrowing amounts etc. were fixed income positive and the bond markets cheered these announcements. The debt markets also seem to have been buoyed by the government’s intent to raise some of its sovereign borrowings in foreign bond markets as this can lead to less bond supply in the domestic local markets and thereby reduce the pressure on bond yields. A substantial lower move in bond yields post the budget has indeed happened, but further scope for yields heading lower remains albeit at a slower pace than in the recent past. Furthermore, on a risk/reward basis, we see value in the short/medium maturity high grade bonds.
 
What are your near-to-medium term views on the benchmark yields and what factors do you think can drive them going forward?
Since the budget, the yield on the 10-year benchmark India government bond had fallen nearly 50 bps (100 bps = 1.0%) to around 6.25% and it last closed (Date: 19-Jul-2019) at ~6.36%. Bond prices have appreciated significantly in the last few months, and near/medium term triggers with could influence their movements are the FOMC meeting of the US Central Bank (US Fed) in end July and the RBI’s bi-monthly meeting in early August. At both these meetings it is expected that there could be a reduction in the respective policy rates, and these actions would likely underpin the bond markets. On the flip side, geopolitical concerns led by trade skirmishes between USA and China and potential impact on crude oil markets on account of any adverse fall-out of the US sanctions on Iran remain risks.
 
As the RBI is expected to remain dovish, what is your advice regards to investment in Long-Duration Bonds and Fixed Maturity Plans? Considering interest rates are going down does it make sense to shift to higher durations funds or accrual funds?
Duration bond funds have different risk/reward characteristics as compared to Fixed Maturity Plans (FMPs) and accrual funds. Markets are ever dynamic and volatility is inherent to it. Thus investment in a particular product will need to depend upon the risk appetite and also the investment horizon of the investor.        
 
Duration bond funds will likely deliver performance in an era of lower interest rates and vice versa, while fixed maturity plans will usually “lock into“ a certain level of interest rates and should ideally be agnostic to any interest rate changes over the investment horizon. Accrual funds while not totally agnostic to rate changes are largely expected to deliver relatively steady returns.  
 
In the current context, the RBI changed its stance to accommodative in June 2019 and thus any further policy rate cuts could lead to duration funds outperforming FMPs or accrual funds in the near/medium term. However, one will need to take a holistic view as risk/reward is two sides of the same coin.
 
Large part of alpha in debt is based taking credit risk rather than duration risk, will that continue?
Alpha can be generated by active duration management as well as a play on credit and the suitability of the strategy should largely be determined by assessing the risk taking ability and the investment horizon of the investor.
 
Did the debt fund start behaving like Banks while lending to promoters? Will they not have NPA similar to bank?
It is implausible to suggest whether “debt funds started behaving like banks while lending to promoters” and also painting all such investments with the same brush. Mutual funds form an important part of financial intermediation, and credit risks are inherent to this process.   
 
What is your advice to the investors who are looking to invest in debt mutual funds?
Depending upon the objective, fixed income (debt) can be viewed as an integral pillar of asset allocation to realize future goals. There are different categories of debt funds which in all likelihood could meet the need and the risk appetite for such investments. 
 
What is your advice to the investors who got stuck in the debt mutual fund schemes having exposure to the companies defaulted on their debt/interest obligations?
It will be imprudent and improper for us to suggest a “one size fits all” answer for investors who have unfortunately borne the brunt of such events. One will need to assess the ability/intent to repay of the individual credit (borrower), and also take into account the extent of such investment write-downs, investment objectives, relative opportunities etc. before taking a conscious call.   
 
Here, we would like to highlight the fact that none of the schemes of Indiabulls Mutual Fund fall in the category of debt fund schemes which currently have exposure to the companies which have defaulted on their debt/interest obligations.

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