‘Investors can go long on duration funds’ : UTI Mutual Fund: Business Line

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The RBI is likely to set the ball rolling on rate cuts around March, says Amandeep Chopra of UTI Mutual Fund

The RBI, now more convinced of a declining trend in retail inflation, is likely to cut policy rate in March this year, says Amandeep Chopra, Group President and Head of Fixed Income, UTI Mutual Fund. He adds that any rate cut by the central bank is likely to be the beginning of a series of rate cuts.

Debt markets have been upbeat after the December policy review. What has changed from a policy standpoint?

 The December policy review has been important, in that there has been a significant change in the RBI’s tone and stance.

It is now more convinced of a declining trend in CPI inflation and is looking at some degree of easing, going ahead, early this year.

The RBI has also stated that it would not like to flip-flop on rates. So any change in policy stance (to easing) will most likely be the beginning of a rate cycle. 

From that perspective, any rate cut by the RBI is likely to be the beginning of a series of rate cuts. We have been positive on rates coming down for some time now. This has been mainly due to the sharp fall in crude prices. While we earlier expected a policy rate cut in mid-2015, it is now likely to happen as early as March this year. 

Why do you think the rate cut will happen in March and not in the February Review policy?

 There are three reasons for this. One, the November CPI inflation fell to 4.4 per cent. But this will be the lowest level, in our view.

For the December month, CPI inflation can move up to 5.4-5.7 per cent, which will be released in January. This will be critical for the RBI — seeing how much inflation can move up, its momentum, once the base effect wears off. If it stays close to 6-6.5 per cent, then it will provide comfort to the RBI. By March we will have two more data releases to watch this trend.

 Two, the RBI has clearly indicated that it will keenly watch the fiscal deficit targets.

With the Budget, it will be able to gauge the commitment of the Government towards fiscal consolidation.  Also, in March, we will be one FOMC meet away from the possible start of the rate tightening cycle in the US. By then, the FOMC would have provided additional guidance to the markets on its tightening bias.

How much more of a downside do you see, given that yields on 10-year G-sec have already lost 100 basis points in the last one year?

When we started the year, there was no expectation of either a rate cut or falling inflation. In August-September, commodity prices started to fall. Markets started to take cognisance of this in October, and the spread between 10-year G-sec yield and repo rate narrowed. The yields fell below the policy rate after the December policy.

This is very typical of a market that runs ahead of an event. At this level of 7.76 per cent, it is already factoring in a certain rate cut.

That said, unless the RBI reverses its stance or guides towards caution, we don’t see an upside risk to rates (rates going higher) either. The yields at 7.85-7.95 per cent levels should sustain till the next trigger.

What is the duration you are maintaining on your long-term gilt fund?

UTI Gilt Long Term Fund has duration of about 10 years.

Your UTI Dynamic Fund has done well but your UTI Bond Fund has not. Why?

Our Dynamic Bond Fund aims to represent our short-term view on long-term rates.

Hence it operates within a much wider range of maturity. At the lower end, the maturity can go as low as 1.5-2 years, and when we are bullish on rates, it can also go as high as 12 years.

 But our bond fund is a flagship long-term debt fund. When we turn bearish on rates, we do not lower the maturity aggressively; it can reduce to five-six years.

On the upper end it can go up to 14-15 years. So, clearly Dynamic Fund was able to perform well in 2013 as it was able to cut down its maturity. The fund now has average maturity of nine years while the bond fund has a maturity of about 11 years.  

So our UTI Bond Fund needs to be compared with other flagship income funds in the category. It has done well when compared with other similar funds.

Your advice to investors?

We have been advising investors to invest some portion in long-duration funds.

While there may be some volatility in the short term, if you look at a three to five-year cycle, bond funds (long-term debt funds) have delivered 8-9 per cent, which is good because you have benefits of indexation.

You need to alter your allocation based on the rate view.

Today, if you are positive on rates, then you can increase your allocation in bond funds.

When you turn bearish, you can cut back and increase allocation in short-term and liquid funds.