There are pockets of opportunity and one needs to carry out a diligent research on the companies to identify good credits.
Funds that invest in longer-term bonds and those that invest in lower-rated debt may do well in 2013, says seasoned debt fund manager Amandeep Chopra who is Head-Fixed Income at UTI Mutual Fund.
Excerpts from the interview:
What is your outlook on interest rates in 2013? Must investors lock into current rates by subscribing to Fixed Maturity Plans or FDs? Is there any advantage to going in for open end debt funds?
Our outlook is one of a general decline in the interest rates in 2013. This will be across corporate and government bonds as also the deposit rates offered by banks. However, while the direction is becoming quite clear, as has been highlighted by us earlier, there is still a fair amount of uncertainty in the precise timing and quantum of this decline.
In this backdrop, we feel the open-ended funds offer a better alternative than just the Fixed Maturity Plans or FDs. The open-ended bond and short-term funds are running a duration which can capture this decline in rates and also offer the benefit to investors of exiting if the volatility increases or the quantum of decline in interest rates is asymmetric.
Which category of debt funds should investors bet on for 2013?
Given the easing liquidity, higher conviction on cut in policy rates and the initiatives taken on the fiscal front, the higher-duration funds are now expected to outperform the short-term funds. We still continue to suggest a mix of short-term and long-term funds but with some changes in allocation over what we were recommending in the beginning of the year.
We feel a mix of long-term gilt and bond funds with a 25-30 per cent allocation to short-term bond funds will do well over the medium term.
However, this allocation needs to be fine-tuned in consultation with financial advisors.
Quite a few fund houses, including UTI, are launching debt funds that will invest in lower credit quality, non-AAA paper. Given that such paper is usually illiquid, isn’t this a risky proposition?
What return improvement can investors in such funds expect for taking on more risk?
With the economic growth and corporate financial performance showing signs of bottoming out, there is opportunity in this product category.
The recent move to enhance economic growth and lower interest rates bodes well for the Indian corporate sector and its cash-flows thus improving the credit health.
In this backdrop, we see the credit cycle turning positive and some scope for rating upgrades and spread compression.
So, investors with an 18-month horizon can look at this product to diversify from simply following a duration strategy.
In 2012, we have seen many cases of corporate distress in repaying term loans, FCCBs and so on. Do you think the leverage position of India Inc on the whole is improving?
It appears that with another one/two quarters of slow growth, there will be stress in the corporate sector, especially for corporates with weak business models and very high leverage. It is too early to talk of real numbers as the position will become clearer after March 2013 results. However, there are pockets of opportunity and one needs to carry out a diligent research on the companies to identify good credits.
Mutual funds have been upping their stake in government bonds. What is the outlook on gilts in the absence of rate cuts and the rising risk of fiscal slippage?
Again, the funds have been increasing duration as the conviction on rate cuts is much higher today than it was a quarter ago. There has also been sufficient guidance by the recent RBI Monetary Policy and the mid-quarter review.
On the fiscal side, it appears that Government is very confident in meeting its deficit targets with the initiatives undertaken recently.
There have been numerous official statements to this effect, so it appears that they do have a few measures up their sleeve!
The markets are expecting significant slippage to the tune of 5.8-6 per cent, so any number lower than the street estimates, even if marginally higher than the budget estimates of 5.3 per cent (say 5.4 or 5.5 per cent) will be perceived by the fixed income markets quite positively.
What would be the impact of a sovereign rating downgrade on yields?
Moderately negative. Surprisingly the impact may not be as negative as was perceived earlier since the world is going through a synchronised credit deterioration in the back-drop of low growths and large fiscal deficits. But in our house view the probability of such an event is very remote.
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