"Short-term bond fund and lower maturity products may outperform in this financial year as compared with duration products"
facebooktwitter

"Short-term bond fund and lower maturity products may outperform in this financial year as compared with duration products"

"Bond yields are expected to be stable or have an upward bias as the Indian economy remonetizes; FII flows and insurance demand is expected to be strong which should support bond yields"

 Renu Yadav   
  • May 3, 2017  
  • |  
  • UPDATED   13:47 IST
Nagarajan Murthy,
Nagarajan Murthy

Nagarajan Murthy, Head-Fixed Income - Tata Asset Management, talk to Renu Yadav in an e-mail interview about bond funds, inflation rate hike in 2017-18, and returns expectation from debt funds over the next one-year period.

1) Tata Corporate Bond Fund was restructured to broaden the mandate and make it more flexible. What was the thinking behind this?

With interest rate policy stance changing to neutral from accommodative, yields will have stable to rising bias. In such environment, Tata Corporate Bond Fund is positioned around 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.

Tata Corporate Bond Fund is suitable for retail investors who have a holding period of more than 3 months. It would create a portfolio of corporate bonds and money market to take advantage of favourable yields present in the short end of the yield curve compared to the current repo rate of 6.25 %. As the maturity of the portfolio is lower, it would benefit investors in a rising interest rate scenario.

2) How Tata Corporate Bond Fund is different form Tata Dynamic Bond fund?

Tata Corporate Bond Fundwill operate between ultra-short-term and short-term category. TheFund will primarily buy short-term bonds having maturity between one and two years. It will not invest in government securities at any point in time. The focus of Tata Corporate Bond Fund would be to generate income through coupon accruals, and less from capital appreciation. Tata Dynamic Bond Fund is focused on generating income by forming view on interest rates, primarily through exposure to government securities.

3) The yield of 10-year benchmark G-secs has strengthened over the past one month which clearly indicates that interest rates are unlikely to go down. Where do you see the bond yields over the next one year?

Bond yields are expected to be stable or have an upward bias as the Indian economy remonetizes. 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.

4) What is your view on inflation going forward? Do you see a rate hike happening in 2017-18?

CPI inflation is expected to move up due to base effect and points mentioned above, from second half of current fiscal year from sub-4% levels. Moreover, core inflation - adjusted for food and fuel - has remained stickyaround 4.8%-5.0% levels. While RBI should wait for more data in terms of economic activity like higher capacity utilization, pick-up in credit demand, it remains committed to keeping inflation down to 4% on a durable basis. As GDP growth fears fade with economy activity picking-up after transitory growth slowdown, we see possibility of a rate hike in second half of year, with RBI determined to keep inflation expectation entrenched.

5) Given the uncertain interest rate scenario, what should be the strategy of a debt fund investor?

Given the change in monetary policy stance to neutral from accommodative and RBI's continued thrust on maintaining CPI inflation at lower levels, interest rate seems to have bottomed outin current cycle. Further, best of the easy banking system liquidity - driven by ban on SBNs - is behind us, with majority portion of currency making its way back in economy. With interest rate trajectory expected to move up gradually over medium term, the short term bond fund and lower maturity products may outperform in this financial year as compared with duration products.

6) What kind of returns investors can expect from debt funds over the next one-year period?

Most of the returns are expected to come from accruals of the portfolio in the current financial year. Lower maturity products with high quality papers could be preferred by investors.