The future performance of corporate bond funds, banking and PSU funds, and short-term funds depends on factors such as market conditions, interest rates, economic outlook, and fund management strategies. In an interview with BT’s Navneet Dubey, Mahendra Kumar Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India), said, “The prevailing market sentiment suggests potential rate cuts ahead. If this scenario unfolds, long-duration funds are likely to outperform initially. Subsequently, we can expect low-duration and ultra-short funds, positioned at the shorter end of the curve, to demonstrate improved performance.”
Corporate Bond Funds invest in bonds issued by corporations, aiming for fixed income. Banking and PSU funds invest in debt securities of banks and public sector undertakings. Short-term funds focus on short-duration debt instruments for income generation.
Edited excerpts:
BT: When will RBI start cutting rates? How influential will the US Fed’s decision be in this regard to RBI’s decision?
The global central banks seem to be guiding for a rate cut. In the recent times Indian economy has been hailed for macro stability and has sailed through difficult tides without any major disruption. Having said that, there are some challenges yet that need be addressed such as inflation still hovering 5% + and continued uncertainty over geopolitics, which could impact commodity prices. In the age of globalisation, major economies are closely interlinked and even though RBI has been repeatedly reiterating its focus on domestic developments, it cannot completely ignore the linkages. Therefore, Fed rate decisions to cut may provide some breather for RBI to consider the same, but it may have to wait to strike it right to maintain balance between domestic and global factors. Considering all variables, RBI may still consider a shallow rate cut cycle of about 50 bps in Q3 of current year 2024.
BT: We have seen a steep fall in 10-year yields from October last year to now. Do you think the market has already discounted a rate cut? How do you see the curve in the near and long term?
The combination of tighter liquidity and expectations of rate cut has resulted in a flatter yield curve. While the longer end of the curve has been driven by the rate cut expectations, one should also consider that India bond inclusion in global indices has also been a positive trigger. As of now the challenge remains with narrow spreads between US and India benchmark yields and sticky inflation. To some extent, rate cut expectations are discounted but the future fall in yields will be determined by the depth of the rate cuts and the actual inflows from the listing on bond indices. Overall, we expect long yields to ease further in the early part of the rate cut cycle and the curve to witness bull steepening with short-term rates moving lower after faster pace thereafter.
BT: We have also noticed the spread between 10-year, 5-year, and 2-year bonds vanishing. In such a scenario, how are you changing your investment strategy?
The spreads vanishing across segments is primarily result of two things, one tight system liquidity keeping the short-term rates higher and long end of the curve declining due to rate cut expectations and demand from various financial institutions such as EPFO, insurance and Mutual Funds. Considering markets are skewed towards longer end and an eventual rate cut is expected, in line with markets, we have also adapted an overweight stance in duration.
BT: Will India’s inclusion into various bond indices push yields lower? Can this hurt investor return in the medium term? How should a retail investor read these developments?
If one has to gauge how bond markets are to react after inclusion, a simple way to look at it is a mere announcement of bond inclusion has led to positive FPI flows in Indian bond market in 2023 after five consecutive years of negative flows and it continues in 2024. Obviously, one cannot ignore macro stability and the supportive role that it has played to enable this entire process.
If anything, retail should read this inclusion positively and the actual flows of the bond indices will enhance the demand further. Therefore, if investors risk appetite allows they should opt for duration and reap the maximum benefit of the situation.
BT: RBI has been trying to suck liquidity from the banking system in a gradual manner. As a result, are you seeing more corporates approaching the bond market to raise money?
RBI has been actively managing liquidity which has largely been in line with what it has communicated in its policy statement and has been managing a fine balance between liquidity and financial stability. With regards to liquidity deficit, if we observe system liquidity has been ranging from positive to neutral zone but overall in negative territory due to government cash balances piling up. Also, there doesn’t seem to be concerns with liquidity in banking system because credit to deposit has been constantly running high at 80% vs 75-76% pre-Covid. In this case, liquidity deficit has no direct correlation with supply of corporate bond. Corporates have not started raising aggressively and whatever is being raised is being quickly absorbed by the institutions such as EPFO, insurance and MFs creating demand and being absorbed at competitive yields.
BT: We have been talking about private capex pick-up for a while, but that has not happened at the pace that was expected. The government will eventually slow down its spending drive, sooner or later. What I also want to understand from you is from the activity in the bond market, is there any sign that the pace of private capex is increasing or it is business as usual?
So far there has been no significant pick up in the capex in private sector, public sector has come in to borrow after two years but that too more for working capital purposes rather than capex. In general, it is believed that capex starts after industry capacity utilization surpasses 75%, currently it’s at 74% and has been hovering around those levels.
With India growth pace maintaining and pickup in manufacturing setups due to PLIs and foreign companies setting up in India, there could be capex in near future. As of now there are no definitive signals of the same.
BT: What kind of funds can perform better from here on?
The market view is there is going to be rate cuts, if that’s the eventual course then the long duration funds such as Corporate Bond Fund, Banking and PSU and Short-term funds should perform in the first lag, this will be followed by funds performance in Low duration and Ultra Short funds, which are placed on the shorter end of the curve.
BT: For an investor with 5-year investment horizon and having a moderate risk profile, how would you allocate Rs 10 lakh across the debt mutual funds?
An investor with 5-year investment horizon and moderate risk profile may look at investing in Corporate Bond Fund, Banking PSU and Short-term fund. Needless to say, this is a general observation and investors should consider their respective risk profile before any such strategy.