The mix of debt and money market would serve better for an investor in the current interest rate scenario

What is your outlook on the Indian economy? Do you expect the Government to meet the fiscal deficit target of 6.8%?

The second wave has reset the expectations of the economic growth and forecasts have been downgraded following the severe second covid wave. Analyst's projections estimated in 12.5%-13.0% range before Covid2 are now downgraded to 8.5-9.0%. The RBI's consumer confidence index fell to record low, the Current Situation Index (CSI) and the Future Expectation Index (FEI) fell to an all-time low of 48.5 and 96.4 respectively for the month of May. This despite targeted lockdowns and limited mobility restrictions. The sentiment remains low as major states opted for lockdowns and shutting business activities, though there is re-opening in gradual phases restoring the confidence supported by some high frequency indicators - E-way bill generation is back to 2mn similar to 2021 baseline, railway movement increased by 7% and airlines by 10.8%, port traffic also showed a pickup of 5% and labour force participation improved to 40.6% vs 39.6% in June. Amidst these developments government has remained fairly conservative on the stimulus, the only support that has come through has been free food and vaccine and some further announcements to support manufacturing. This overall is set to cost 0.5% fiscal slippage. While there is an improvement shown, the future of it largely depends on the pace of vaccinations that stood at 3.4mn in July vs 2mn in May. With this pace we can expect ~42-45% of the Indian population to be vaccinated with at least one dose by year end bringing back the confidence of re-opening the economy. With growth projections moderated only slightly and expenditure side remaining largely unchallenged, fiscal deficit target may be met without any major encumbrance.

What is your outlook on inflation and interest rates?

Rising inflation has become a global phenomenon, while global central banks guide for it to be transitory in nature, there is still no certainty where its set to head. If we have a close look at the inflation buckets globally the two segments that contribute to higher inflation is energy prices and the increase in services cost. This is the result of supply constraint and hesitancy of labour force to return to the contact intensive sector, till these factors don't smoothen out inflation will continue to be on higher side. As for the interest rates even after economic pickup seen in most of the developed nations (backed by vaccination progress), major central banks remain committed to stay accommodative reflecting that the growth is in nascent stage and needs to be supported. Another reason for central banks to keep the rates low would be high government debt burden, 2020 has been the first time when global govt debt to GDP ratio has crossed 100%, this debt trap is likely to imply that the central bankers will keep the interest rates low for a foreseen future. In essence therefore, interest rates are likely to remain range bound with no space for rates to fall but any spike in rates likely arrested by central bank intervention.

What is your outlook on Government Bond yield curve? Do you expect yields to harden? Which parts of the yield curve do you expect to steepen?

Market is well aware of the fact that RBI has been guiding the yield curve where the focus has been on the benchmark securities, RBI single headedly holds 80% of the last 10Y benchmark issuance. Though in GSAP 2.0 its tried to correct its course by concentrating on non-liquid papers, the expectation is that the focus will return to benchmark securities. Of late, central bank guidance has shifted towards an orderly evolution of yield curve and thus expect curve to steepen somewhat in early phase of monetary policy normalization. At a more evolved stage, short end rates will tend to move up as liquidity tightens when curve is expected to flatten.

Money market rates have remained low for the last one year or so. Do you expect the rates to remain low?

The mix of several factors has led to lower money market rates in the past year, such as lower key policy interest rates, excess system liquidity and lower issuances. Till these continue the rates will remain low, the change might come when RBI indicates normalization of rates or bringing back liquidity to the neutral level.

Which duration strategy is more suitable for very short duration (less than 1 year) debt or money market instruments in the current interest rate environment – active duration management or duration roll down? Please explain, for the benefit of retail investors and IFAs advising investors.

The mix of debt and money market would serve better for an investor in the current interest rate scenario balancing the accrual and capital gains. Considering the current situation where money market curve is pretty steep, a roll down strategy would benefit the investors as there is lot of uncertainty and dilemma between growth and inflation.

You are launching a new fixed income scheme, Mirae Asset Money Market Fund. Please describe your investment strategy for this scheme.

As the name suggest Mirae Asset money market fund shall be investing in money market instruments (instruments maturing within one year). The investments will be made across the segments such as CPs, CDs, T-bills, CMBs and Corp bonds in maturity primarily ranging between 6-12 months depending on the market situation.

For the benefit of retail investors, please explain the difference between your Savings Fund and Money Market Fund. What are the things, investors should consider when deciding between the Savings Fund and the Money Market Fund?

When one talks about money market fund it is strictly limited to the securities that mature within one year, but savings fund provides the flexibility to buy higher maturity securities yet maintain the duration to meet the guidelines. This while the two funds have the same duration range, the composition of portfolio would be quite different. While investing investors should weigh in that there could be relatively higher volatility in savings fund than in money market fund.

Mutual fund investments are subject to market risks, read all scheme-related documents carefully.