Senior Fund Manager
Fixed Income Investment
Reliance Mutual Fund
The expected decline in rates due to various macro-economic impacts of demonetisation will also make debt mutual funds an attractive avenue for investors," says Prashant Pimple , Senior Fund Manager, Fixed Income Investment, Reliance Mutual Fund.
economictimes.com: Almost every debt mutual fund category except liquid and ultra-short term has offered double-digit returns in 2016. What are the factors that contributed to the performance?
Prashant Pimple: In the last one year, we have seen a lot of improvement in domestic macroeconomic parameters like fall in inflation (from 5.50% - 4.20%), least volatility in FX due to lower CAD (current account deficit), improvement in domestic liquidity conditions, primarily through bond buybacks (Open Market Operations - RBIs neutral liquidity stance). Finally, the demonetisation move from government led to excess liquidity, additional demand for G-secs and expected improvement in fiscal balances.
In light of the above, we have seen RBI's monetary policy stance remain accommodative and hence Indian 10 year G-sec benchmark has dropped from a level of 7.70 per cent in December 2015 to the current level of 6.25 per cent. In expectations of positive demand - supply for bonds as well as continuation of RBI's accommodative monetary policy stance- funds were maintaining higher duration across all duration funds, which ultimately resulted in better returns over last year.
economictimes.com: Some debt mutual fund schemes have scared investors with their poor quality papers. Example, Amtek Auto issue. How do investors tackle this issue?
Prashant Pimple: For the record, we never had any exposure to Amtek Auto in the past or even when this event occurred. It is important to understand that credit/accrual funds are different from plain vanilla debt funds in terms of portfolio, construct and management. Investors in this category need to look at several parameters like credit risk diversification, rating profile, maturity profile of these funds, most importantly the experience of the team and the track record of the fund house managing these funds.
Investors should give due importance to the above parameters and then decide to invest. With interest rates across the spectrum falling and expected to fall further credit/accrual funds offer a good investment avenue from a 3 years plus perspective with expectations of better returns on a risk reward basis.
economictimes.com: Have you noticed any kind of change in the behaviour of investors after the episode?
Prashant Pimple: Yes, we did witness some amount of cautiousness immediately after the episode with AUM growth in these funds stagnating for a while before starting to pick up again. From a behavioural perspective certainly we have seen a change in terms of how an investors assesses these funds, focus has clearly shifted from only higher gross yield as a criteria to understanding the underlying risk in the fund and how well the fund house is capable of handling and diversifying such risks.
economictimes.com: Demonetisation is major theme this year. What impact would it have in the mutual fund space?
Prashant Pimple: Demonetisation will lead to far reaching behavioural changes in household savings pattern. Incrementally, we expect the physical savings to be channelized to more productive financial savings, thus benefitting the mutual fund industry as a whole. The expected decline in rates due to various macro-economic impacts of the demonetisation move will also make debt mutual funds an attractive avenue for investors to invest as compared to traditional values such as fixed deposits, postal savings etc.
economictimes.com: What is in store for debt mutual fund schemes in 2017?
Prashant Pimple: We have been constructive on Indian bonds for a while now with the view that monetary easing cycle will continue and better liquidity in the banking system will push bond yields lower. With the government's latest announcement of demonetising higher denomination notes our view further got strengthened and we would like to re-iterate our positive view on Indian bonds. We continue to remain constructive on Indian rates as from a bond market perspective, immediate improvement in bank deposit base would lead to higher SLR demand. Further the fiscal impact will also be positive to the extent that there might be windfall gains from RBI which will help achieve deficit targets and could conceivably leave government balances on stronger footing. Also on the longer term, the move towards non-cash economy and the introduction of GST should lead to structural improvement in tax compliance and tax/GDP ratio implying rerating of India's fiscal position.
Further, with the expectations of disinflationary trend and anticipation of monetary policy easing would support bond yields. We expect further easing in terms of 50-75 bps of rate cuts in the near future leading to further fall in bond yields. Thus, Debt Funds should continue to do well in 2017.
* As told to economictimes.com