The Hindu Business Line : `Interest rates are expected to remain volatile'

Mr Naval Bir Kumar, MD, sticks to his only-debt moorings. He also urges longer-term investors to consider close-ended debt schemes with a view to benefit from the current high interest rates if liquidity is not an issue for them.

Excerpts:

You don't offer equity products at all. Do you agree this only-debt posture is not quite convincing?

I completely disagree. Both debt and equity asset classes have different roles to play in any asset allocation. A debt fund attempts to give consistent returns while preserving capital over the stated investment horizon. An equity product creates the possibility of higher returns while taking higher risk.

Investors here have typically started chasing returns when either asset class has already peaked; they have also burnt their fingers. Each investor should determine a static asset allocation based on his risk-return profile and persist with the portfolio without falling prey to the desire of chasing returns.

An investor seeking to invest his retirement benefits should typically have a debt-heavy portfolio, as he does not want significant risk on his capital, while an investor in the 30s desiring greater returns at a higher risk should have an equity-heavy portfolio.

What are the factors that could influence debt fund returns over the next one year or so? What are your concerns with regard to performance of debt funds at this stage?

Interest rates are expected to remain volatile and there is a possibility of another repo rate hike in the next few months.

The factors driving interest rates up are inflationary expectations, pick-up in credit demand and offshore rate structure. High commodity prices have caused a supply side driven inflationary pressure over the last one year. This pressure has eased with China attempting to slow its economy down and oil prices declining post the US elections.

Over the next few months RBI is expected to remain cautious on account of inflation and analyse if inflationary expectations are building up. The extremely low interest rates and high levels of liquidity have fuelled demand, resulting in higher credit offtake. RBI has begun gradually increasing interest rates and reducing the level of liquidity but the impact of these measures on credit growth will not be immediate.

The next few months still remain a period to be cautious over interest rate movements. We recommend that short-term investors invest in cash and floating rate funds to safeguard themselves from volatility in interest rates.

Longer term investors should consider close-ended debt schemes to benefit from the current high interest rates if liquidity is not a concern.

What could your investors expect in terms of new products?

Our role as a mutual fund is to act as a bridge between the opportunities offered by the market and investors' aspirations. We look at understanding their needs and launching products to serve those needs when the market offers the opportunity.

The closure of the tax-free RBI relief bond left a gap for investors who wanted a tax efficient long-term savings product with minimal risk. One of our recent launches was a 2.5-year closed ended option that was timed to take advantage of the prevailing high interest rates in the economy. In keeping with our existing strategy, we will continue to launch innovative but relevant products in the future.

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`Interest rates are expected to remain volatile'