We shall continue to focus on investing in high credit quality papers

What is your outlook on interest rates? How much further can / will RBI cut interest rates?

At the start of the ongoing Covid pandemic, financial markets witnessed a sharp sell-off, unnerved by the uncertainty of lockdown and possible impact on economic growth and debt serviceability. Most global centrals including the RBI delivered massive rate cuts, injecting liquidity and took steps to ease flow of credit to stabilize financial markets. Six months down the line, RBI has successfully achieved its target of ensuring stability and smooth functioning of financial system. It may now switch focus to more conventional economic indicators like inflation, fiscal deficit and currency volatility. While recent surge in inflation is a concern, growth is going to be a greater concern at this stage with economy still in a contraction phase. RBI may choose to take a pause on rates cuts, but it will most likely want to ensure lower interest rates to support growth. Thus, while interest rates may not fall meaningfully from current levels, unlikely that rates will rise sharply in the immediate term. For that purpose, RBI may opt for other non-monetary tools such as OMOs or operation twist to keep any sharp rise in rates in bay. Thus, interest rates are likely to remain range bound in the immediate future.

What is your outlook on bond yields and debt market?

While there are signs of moderate recovery across the globe, there is no clear trajectory as to where this pandemic is heading with fear of second wave. But none the less severe lockdown looks like a story of yesteryear. In recent months, supported by RBI measures like LTRO/TLTRO, corporate bond spreads more pronounced in shorter tenors, have eased. Lower rated credit and MSME sectors have also witnessed better financing conditions. However, during this period, govt bonds yields have inched up somewhat due to concerns on rising inflation. With recent intervention by RBI by way of operation twist/OMO, markets are beginning to stabilize. RBI will most likely want to dismiss any apprehensions of any possible sharp spike in yields through periodic market intervention. However, concerned with recent surge in inflation and weighed down by fear of high supplies, market hardly has strength to take yields down on its own. Thus, outlook should improve going forward with interest rates remaining range bound.

What are views on liquid fund returns given the measures taken by RBI to boost liquidity?

Yields at shorter end of yield curve have already reached low and are now expected to remain range bound. Liquid fund returns compared with its recent performance will be at the lower end of range, but it we see it in comparison of traditional products like saving account or RD/FD liquid fund remains attractive in short term space.

You are launching an ultra-short duration fund. For the benefit of retail investors please describe the salient features of this product?

The decision to launch Mirae Asset Ultra Short Duration Fund is in line with our objective to complete the debt product offering over a period of time and providing more investment options for our investors. The fund will follow our stringent debt investment process and invest predominantly in highly rated instruments with an aim to offer better risk adjusted returns to investors. Ultra-short duration funds invest debt and money market securities such that the Macaulay Duration of the scheme portfolio is in range 3 months to 6 months.

There was a perception among retail investors that liquid and ultra-short duration funds are safe. However, this perception got broken by the credit events over the past couple of years. What are your views on credit risk in the ultra-short duration category? What are the credit risk management mechanisms in Mirae?

Debt funds carry two primary risks, that of interest rate volatility and that of credit defaults. There seems no significant damage to perception of safety of these categories of funds. Any one with basic understanding of debt markets would understand that a credit event can happen anytime and in any category of funds. Lesson that has perhaps been delivered is to avoid aggressive credit risk in debt funds generally. Further, the AUM data show the liquid and ultra-short categories continue to see good traction and there is no argument to show fear of negative views from investors. Mirae has always followed its mantra that Credit risk is permanent but interest rate risk is temporary. This has served us well and we believe that we should continue to remain on the same trajectory. Mirae debt investment process involves both macro and micro level of analysis we look at interest rate environment as well as financials analysis of individual paper. We are clear that no aggressive credit risk should be taken in debt funds including Ultra short duration fund. We shall continue to focus on investing in high credit quality papers.

Who should invest in ultra-short duration funds? What is your general advice to investors looking to invest in your product?

These funds are suitable for investors with short term investments horizon of (3-6 months investment horizon) since they are less volatile and likely to produce more stable income compared to funds with longer duration profiles. Also, this is suitable for STP in high volatility funds. Interest rates are expected to remain at lower levels and investors should take exposure in debt funds based on their investment horizon. Choose a product based on investment horizon and risk preference.

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