Our core approach always has been that credit risk is permanent whereas the market risk is temporary

What is your outlook on debt market in the current economic situation? Do you see bond yields coming down in the coming months?

Disruption caused by ongoing coronavirus crisis and consequent expected slowdown in economic situation has resulted in huge FPI selling and redemptions in mutual funds leading to sharp spike in bond yields. Across the globe, central bankers are reacting to this pandemic with massive rate cuts and liquidity injection to stabilize financial conditions. India is at crossroads as while it has not joined the race to slash rates, it sure has taken many measures to provide adequate liquidity in this crisis situation. Further RBI has unequivocally expressed its resolve to do all at its disposal to address the situation. Thus in the coming times with various measures once things settle down, we expect bond yields to further move lower.

Credit spreads have widened in the recent weeks. What are your views? Do you see attractive investment opportunities for investors in high quality corporate bonds?

In the wake of this crisis for sure there has been panic selling and one can attribute that panic selling to FPI offloading and mutual fund redemptions. Once the situation subsides, the activity in the high credit corporate will regain normalcy. Therefore at this juncture with widened credit spreads it looks worthwhile to invest in high quality credits.

Many retail investors are worried about credit risks after recent high profile downgrades Yes Bank, Vodafone Idea etc. How is Mirae approaching credit risk?

Our core approach always has been that credit risk is permanent whereas the market risk is temporary. Since the credit crisis erupted in late 2018, the markets have shown a distinct preference for taking exposures to very limited well-known names. Therefore there is a case of clear polarization wherein only the best of the names are being able to raise money from the capital markets. For others it is increasingly a challenge to refinance the existing debt or raise fresh money. At the time when things were beginning to stabilize, high profile downgrades in the banking as well as telecom space has raised further concerns on the corporate credit quality in the financial space which is again aggravated by the expected severe impact of Covid-19 on the retail portfolios as well. The situation does not seem to be improving at least in the near term. However, it’s a continuous clean-up process which would take its own time to yield results before one could see any meaningful improvement. Our focus remains on highly rated issuers with visible operational cash flows and strong gearing and liquidity ratios.

Mirae Asset AMC has a very good job at managing credit risk compared to many of your peers. For the benefit of investors, please discuss the credit risk appraisal processes you have in Mirae?

In this context we believe that credit risk is permanent whereas market risk is temporary. Most of the fund investments are into the companies largely available in the public domain and those that have a tangible source of cash flow generation. Also, the investments are being made in plain vanilla structures by avoiding any structured deals. As far as the investment universe construction is concerned it is done out of the available set of issuers present in the markets for the issuances in accordance with & to suit the fund / scheme strategy. For evaluation, each and every issuer has to pass through the Internal Rating Model, which on the basis of quantitative (financial risk) as well as qualitative factors (business risk), provides a rating to the respective issuer. Financial risk is measured using a set of ratios focusing on profitability, liquidity, cash flow and debt protection capabilities. Business Risk includes analysis of six parameters i.e. strategic direction, financial philosophy, conservatism, track record, succession planning and control system. Also, a credit approval note is prepared for each & every issuer, which, apart from the internal rating model, consists of the Company description, SWOT analysis, business & industry review. Further, the investment universe is reviewed regularly on a quarterly basis along with their annual review on the basis of annual resultsreview.

Mirae Asset Short Term Fund has given 6.7% return in the last one year, when the average return of short duration funds category was slightly above 2%. As many as 12 short duration funds gave negative returns in the last 1 year presumably due to credit losses. Please explain the reasons for your out-performance since the inception of this fund?

The debt markets have been extremely volatile this year and our flexible strategy aiming to re-calibrate average maturity in line with evolving interest rate view within the allowed 1-3 year duration range and to keep credit restricted largely to highly rates PSU/Bank/Large corporate seem to have worked well in current round. according to the evolving situation. We have taken a balanced approach to stay invested in well spread portfolio of govt bonds, high quality credit credits and also cash if necessary. We try to stick to our core philosophy that credit risk is permanent whereas interest rate risk is temporary. Abiding by the philosophy and placing the portfolio as per the expected developments has helped us possibly.

Mirae Asset Dynamic Bond Fund has been one of the best performing dynamic bond funds since its inception. Please discuss the investment strategy of this fund?

The word dynamic in itself gives the freedom to rebalance the portfolio with evolving interest rate outlook. Thus with this fund we change exposure to longer or shorter maturity bonds and composition between govt bonds and cash equivalents. The duration of portfolio is based on view of domestic and global scenarios, timely evaluated and taken call whenever necessary. With markets being so volatile, this year may have been supportive of such an strategy.

What are your views on risks to FY 21 fiscal deficit target and bond yields creeping up due to Coronavirus? How should investors plan their fixed income investments for short to medium term (2 – 3 years) and long term (more than 3 years) in the current environment?

In the time of this crisis rather than economic factors, the resolution to pandemic will play an essential role. Institutions will have to provide cushion to workers and businesses in form of both monetary and fiscal measures. This is widely accepted by the markets and factored in. However lower crude oil prices may provide some relief but not to a great extent. Despite of fiscal breach the monetary tools are expected to remain supportive to aid this economic blow out thus the bond yields are expected to witness further fall from here. As for investors they should remain invested according to their planned time horizon and ignore the market volatility but keep away from the aggressive credits. More importantly they should consult their respective advisor rather than be guided by this general statement.

Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.