The Hindu Business Line : ‘We will not take any aggressive credit calls’

Bharti Axa Investment Managers has made its foray into the domestic mutual fund industry with the launch of two fixed income funds — Bharti AXA Liquid Fund & Bharti AXA Treasury Plus. In an interview with Business Line, Mr Sujoy Kumar Das, Head of Fixed Income Bharti AXA IM, explained the reasons behind the timing of the money market funds’ launch. He also provided clues on variables that would determine whether an investor should move into short term funds or long dated funds. Mr Das was earlier managing fixed income funds for DSPML Fund Managers.

Excerpts from the interview:

Is there any reason for starting off Bharti Axa’s mutual fund launch with money market funds?

We are starting off with money market funds, which are products positioned at the shorter end of the yield curve. We find it an opportune period now because the yields right now are at very attractive levels compared to what they were 3-6 months ago. It is 200-250 basis points higher than what it was (in a less-than-a-year paper).

As volatility is likely to continue for some more months, until inflation cools off, this would be a good time for investors to enter. However, this is not the right time to go for longer dated bonds because they remain volatile. Returns from our shorter-end funds would be market-relative.

Floating rate funds are believed to be among the best available products to capture a rising interest rate scenario. But, actually, there appears to be a dearth of instruments?

Floating rate funds are definitely phenomenal products for capturing rising interest rates. But our experience with these funds when they were initially launched 3-4 years ago, when the interest rates were going up, is that most of the products lost out due to a dearth of liquidity in the secondary market. And valuation of floating rate funds is also not as easy as valuing other dated fixed securities.

Another big drawback that we felt was that was the dearth of issuers too. As most of them realised that interest rates were going up, they were not very forthcoming in terms of issuance of papers and preferred keep the issuances at the shorter end of the yield curve. Another problem was that in a floating rate fund, the benchmark against which the coupon has to be reset has also to be commensurate.

In a five-year floater, the benchmark against which the coupon would be reset should also be linked to a five-year benchmark. Initially most of the papers that came out in the market were largely of that order. However, over time, the issuers started linking it to the shorter end, which was one year. So, although they were issuing a five-year paper, the benchmark was still at one year. As interest rates were going up at that time, the coupon resetting was not happening.

These are the few reasons why the secondary market for floating securities for the last few years did not really take off.

Currently, one-year FMPs give an indicative yield of 9-10 per cent. So why should you advocate money market funds?

That is for a longer horizon investor. In a liquid fund we expect people to park very short-term money. It is targeted at high net worth individuals and corporate treasuries that would like to use this product for cash management purposes.

The endeavour of these two funds is to generate a return that is marginally above the risk-free rate of the economy. In these two funds we would neither take any aggressive credit calls nor any interest-rate calls. The idea is that if the three-month rate is x, I shall give x+ return.

What are the signals for an investor to move between short-term and long-term funds?

That would largely depend on the interest rate cycle in the country. At present, the 10-year bond is at 8.8 per cent…whether it is an opportune time or not would depend on where one expects the rates to go. This thought process has to start from where the yield curve is. For this, inflation is a very big determinant. If inflation is at 8 per cent and our interest rate is at 9 per cent, there is a very slim chance for the interest rate to drop below 8 per cent.

The gap between inflation and the interest rate would determine whether one should move to short-dated funds or go long. In case the gap is huge, there is a bigger possibility for an investor to make more money when interest rates fall, because the real interest rate has always got to be positive for a welfare economy such as ours.

When the margin is thicker, therefore, one should possibly go long. However, in case it is lower than inflation (as it is at present) then one should roll down and stay short. So the gap between the sovereign yield and inflation should be the key determinant.

What other variables influence the prospects of fixed-income securities?

Apart from inflation, the other key factor is liquidity. The Government is the largest borrower in the market and the biggest fixed income security issuer. Obviously its borrowing programme matters; that would depend on what is the fiscal deficit the Government wants to run for the country; whether it would actually like to borrow or monetise the debt, or whether it expects healthy tax collections.

However, we have seen over the years that there is some pattern to the Government’s borrowing programme. So, there are always some issuances happening. That would push the sovereign income up or down, depending on whether it is actually borrowing.

Two, what is the behaviour of rupee in relation to the dollar? Obviously, there is more money which comes into an appreciating currency. Three, the money market players’ effect — whether banks which have taken deposits lend it out. The person taking the loan would also have money in the banking system… the multiplier effect would determine the velocity of the money that would be there in the system. So, these are the three broad factors, with inflation being a big determinant of interest rate. Liquidity and the government borrowing programme are the others. The corporate borrowing programme also matters, although the quantum is relatively less than the government’s borrowing. If corporates are not able to borrow economically in the overseas market, their domestic borrowings may increase.

How far do you expect the repo rates and CRR to go from here? Last year there was a false alarm of interest rates peaking out, after which they still went up.

Much would depend on inflation. There is a fair chance that inflation will continue its climb until November, after which the high base effect will come into play. Meanwhile, if there are further revisions in the commodity prices and electricity and so on, then it can go up further.

However, interest rates in India may not peak out at any level, they might probably go up and plateau out and stay at those levels. By the time, peak inflation numbers will get priced in. Inflation is probably going to peak out later. Interest rates may peak out by September/October and stay at those levels till inflation starts dropping. Right now, the yield curve is very flat, but if inflation continues then the yield curve can steepen out. There is at least a further 50-100 basis point movement expected.

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