Investors with 2 to 3 years horizon should consider investing in short term debt funds

India’s fiscal deficit target for FY 2018 has been revised to 3.5% from the target 3.2%. While this revision was expected, the fiscal deficit target of 3.3% versus earlier target of 3% for FY 2019 was slightly wider than the market was expecting. What are your views on the FY 2019 fiscal deficit target and its impact on the debt market?

FY 18 deficit was higher primarily due to slower GST collections and higher fuel subsidies. Fiscal deficit for FY19 at 3.3% also looks slightly optimistic. Given that uncertainty over GST revenues still continues and that expenditure may surpass estimates next year especially as it’s the penultimate year before general elections, fiscal deficit for FY19 is also expected to over shoot the budgeted target by a small margin. Any over shoot of deficit target would be negative for the market. The spending mix should be the key to watch, if there is revival in capital expenditure there could be better structural stability which in turn would balance the overall macro situation. Besides, markets are already cautious about fiscal widening and have already factored in the effect thus minimal incremental impact on the bond markets.

What will be impact of increasing Minimum Support Price to 1.5 times of production cost on inflation? Rising crude prices is another concern. The RBI has raised inflation target to 5.1% for Q4, FY 2018. Do you see inflation rising further in FY 2019? Please share your views?

Among various risk highlighted by RBI, there could be inflationary consequences from the revised MSP policy of the government, even though the impact could not be completely factored in at this stage due to lack of adequate details. In early part of FY19, inflation may veers towards 6% mark but given the strong favorable base effect in second half, may ease somewhat. A good monsoon will be a critical factor if the inflation has to ease meaningfully later this year.

The Economic Survey forecasts FY 2019 GDP growth to be in the 7 to 7.5% range. Do you see us achieving the higher end of the range, if the RBI has to embark on a tighter monetary policy? What is your interest rate outlook for the next fiscal year?

Economic survey, RBI and IMF projects high growth for India in FY19, based on the economic development domestically as well as globally. Further, considering low base effect, the growth estimates looks achievable. However, overhang of GST transition still remains. Given this RBI is expected to remain on prolonged pause in 2018, with upside risk to inflation balanced by growth concerns. We believe interest rates have risen sharply over the past few months and now price is fair extent of adversity. Barring a further meaningful deterioration in macros, we expect interest rates to remain stable around current levels.

Fund managers, who Advisorkhoj interviewed in the last 2 or 3 months, expected 3 Fed rate hikes in CY 2018. Stock markets around the world saw a big sell off earlier this week, which many market commentators are linking to interest rate fears. What is your outlook on US interest rates and more importantly, what will be the impact of the US interest rate regime on Indian debt market and bond yields?

US economy is consistently reporting low unemployment data, good economic growth and moderate inflation, considering that these factors continue to perform, Fed is likely to give minimum two rate hikes in CY 2018. Indian yields seem to have already priced the same and thus incremental impact should be minimal.

The rupee has fallen below 64 and there are concerns that it may fall further. What are your views on the rupee in the near term (1 year)?

Rupee has been largely stable against US Dollar but to the extent that dollar itself has depreciated sharply against other major currencies like Euro and JPY, INR has also depreciated against those currencies. Indian macros remain strong and FPI flows remain robust. Unless there is a renewed crisis in emerging market currencies, we expect Rupee to be stable against US Dollar.

2017 was not a good year for bond markets – many debt fund investors were disappointed with 2017 returns. For the benefit of our readers, please explain why 2017 was challenging for debt funds. Please share your outlook on bond markets for the next 1 to 2 years?

2017 started off on a positive note for bond markets, with yields touching low at 6.37% as the inflation remained low, growth concern assured low key rates and government firmly stated that it would follow the fiscal consolidation path. The turning point came in with an unexpected upward surge in global oil prices. Further, announcement of recapitalization bonds for revival of PSU banks confused the markets in regard to structure and fiscal deficit. Lower than budgeted revenue collection due to GST transition assed up to finally government announcing an extra borrowing worth Rs 50,000 crores, deepening the fears. Alongside, global bond yields rose sharply toward end of 2017. However, several measures have since been taken to stabilize bond market such as cancellation of auction by RBI and government announcing cut down in extra borrowing. However rising inflation and widening fiscal deficit continues to remain a concern and may affect the market in near term. In the medium term, if the monsoon is normal, we expect interest rates to stabilize in current range.

Which part of the yield curve is attractive to you from an investment perspective? Should investors who are looking to invest for 2 to 3 years invest in short term debt funds or long term debt funds in the current environment?

In the current environment investors who seek to invest for 2 to 3 years horizon should consider investing in short term debt funds.

What will be your advice to existing long term debt fund investors? Should they remain invested in long term funds or change their investment strategy?

Long term debt investors invest based on asset allocation strategy; these investors should not be distracted by the temporary disruptions and should continue to be invested in long term based on their predefined long term strategy.

Mirae is planning to launch a short term fund shortly. What is your investment strategy for this fund?

The investment objective of the scheme is to seek to generate returns through an actively managed diversified portfolio of debt and money market instruments with Macaulay duration of the portfolio between 1 year to 3 years. The fund will mainly invest in AAA and AA corporate bonds. The fund may also look for opportunities from credit spreads among the range of available debt & money market instruments. The investment strategy of this scheme aims to optimize risk adjusted returns. The Scheme has a short term duration investment option that provides the flexibility to respond to continuously changing market scenario by managing its portfolio in line with current yield curve.

What is your advice to new investors who are looking to switch from fixed deposits to debt mutual funds expecting higher returns? How should they select funds for investment?

We are portfolio managers and not investment advisors. For specific advice, investors should consult respective advisors. In general, typically an investor should invest considering his/her risk appetite and the time duration that they want to invest. We believe long term surpluses should be allocated to bond fund. Other short term surplus or those earmarked for any specific need should accordingly be allocated to an appropriate fund.