‘Dynamic bond fund provides opportunities across debt market' ::Business Line

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Our Dynamic Bond Fund has taken advantage of the volatility in both the government and corporate bond markets. A fund like that can yield better returns for retail investors for whom timing could be extremely tricky.

With interest rates expected to soften from next quarter, investors can look at options such as dynamic bond fund that shift between long and short-dated securities based on interest cycles, suggests Mr Navneet Munot, Chief Investment Officer of SBI Funds Management. He also recommends locking in to attractive yields of short-term FMPs.

Excerpts from the interview:

The recent 50 basis point-hike by the RBI came as a surprise for many. What are your rate expectations from hereon?

 The hawkish stance of the RBI, with its 50 basis-point hike, did come as a surprise to the markets. With that, we believe that we are closer to the end of the tightening cycle.

The growth moderation in developed as well as developing economies, the lag effect of the monetary tightening 11 times now and fall in commodity prices all suggest that we may be at the peak of rate hikes.

We expect interest rates to soften from here on. The only concern as of now is the fiscal situation. However, we believe that the positive factors for the bond yields outweigh the negatives.

The global environment is very positive for bonds.

Given the deflationary forces in the developed world and that the central bank's stance there would be accommodative for a long period, the sheer interest rate differential between us and rest of the world will attract more flows.

I also believe that the worst of liquidity issues in the banking system is behind us as credit deposit ratio becomes more favourable going forward.

The tightening so far in the emerging markets will start hurting growth as well as commodity prices. Inflation is likely to soften in the next one year.

We expect it to be around 7 per cent by the end of the fiscal, even as growth is expected to taper to similar levels. Our belief is that the RBI may announce one more policy hike of 25 basis points and then take a pause. 

We turned positive on the bond market post monetary policy and we expect yields to fall further.

If we are nearing the end of the rate hike cycle, should investors still favour short-term funds? 

 Investors with some risk appetite and investment horizon of over six months to one year should surely look at short-term funds, given that the core portfolio yield is pretty attractive and there is a good possibility of making capital gains in the next quarter, given our view on the interest rate.

What has been the yield as of now in your short term funds?

It has been around 9 per cent per annum.

What is your current average portfolio maturity and have you been reducing it?

 In short-term funds we have been running a two-year maturity with a portfolio across short-term bank CDs and few medium-term government and corporate bonds. It is a high quality portfolio as credit quality is something that we do not wish to dilute.

At what juncture can investors looking at benefiting from falling yields, move to long-dated funds?

For retail investors, timing could be extremely tricky. We therefore recommend products like our Dynamic Bond Fund. We have been able to manage the duration of the portfolio quite dynamically. It can move from almost 100 per cent cash to being fully invested in a 10-year bond. We have seen both the scenarios.

We have been able to take advantage of the volatility in both the government bond as well as the corporate bond market.

A fund like that may yield better returns. Investors wanting to enter a 10-year bond fund or long term gilts by timing it can instead go for the Dynamic Bond Fund. The average maturity in this fund is currently four years. A couple of weeks ago, it was as low as one year.

 So are gilt funds not really suitable for retail investors?

Retail investors have options such as dynamic bond funds but there are investors who like the high credit quality that gilt funds offer.

The possibility of a high duration as and when the interest rate environment is positive is also an attractive proposition for investors.

Having said that, the alternative we are suggesting is a dynamic bond fund, which can move across sectors, such as government bonds, corporate bonds and money market and across the yield-curve spectrum right from a three-month CD to a 30-year bond. It provides enough opportunities across the bond market.

What other options can investors look at now?

Fixed maturity plans look attractive, especially given the attractive levels at the short end of the curve.

We expect credit growth to surprise on the downside and deposit growth on the upside; so short-term yields can soften from next quarter onwards.

Investors should take advantage by locking in at current rates in products such as fixed maturity plans.  

 Non-convertible debentures (NCDs) offer attractive yields now. Would this make for a good opportunity now for retail investors?

The fund route would be obviously better because of the way liquidity, credit and interest rate risks are managed by a fund manager compared to a portfolio of NCDs created by a retail investor. Investors normally chase yields and don't pay adequate attention on credit risks in these long-term NCDs.

Along with the tax advantage in mutual funds there is the convenience of investing in a liquid avenue. Retail investors cannot easily sell an NCD in the bond market.  All these benefits that funds offer make them a superior option.

Is there a dearth of high-quality debt instruments in the market now? 

There have been lot of issuances from public sector companies where we have participated.

That is the most liquid segment within the corporate bond market and also matches our cautious view on the credit environment as of now