The Hindu Business Line : ‘The portfolio will be positioned defensively’

Gilt funds are usually in favour only in a falling interest rate scenario. But Fidelity International is actually arguing the opposite point of view, having recently launched Fidelity Flexi Gilt Fund. Mr Sameer Kulkarni, Fund Manager, Fidelity International, takes a few questions on the outlook for interest rates and why gilts make sense at this juncture.

Interest rates are expected to move up further and gilt prices may be the most sensitive to rising interest rates. Why are you then focusing on gilt securities at this time?

We have an inverted yield curve (where short-term bonds offer better rates than long-dated ones) where the yields on short-maturity papers are higher than on 10-year paper and taking a defensive position will not result in loss of accruals (interest receipts). Though the expectations are that interest rates may go up, we believe it is priced in to the current gilt prices to some extent. What is more, it is not easy for investors to time the market, as stable or declining rates get discounted with little notice.

Corporate bonds currently offer attractive spreads over gilts. So, shouldn’t that be an investor’s choice?

We find that credit rating agencies are indicating that credit quality is likely to deteriorate going forward. Banks have raised their lending rates, which might prompt companies to raise more funds through corporate bonds, increasing their supply.

These two developments together may mean that we will see higher spreads in the corporate bond market. However liquidity (in such bonds) will continue to be lower.

The interest rate outlook now hinges mainly on inflation. What is your outlook for inflation?

Inflation is likely to remain in double digits for the rest of this year. But since it is calculated on a year-on-year basis, next year we are likely to see a favourable base effect, which means the rate of inflation will be lower. Moreover, monetary and fiscal measures taken and more that may follow are likely to start making an impact on inflation over the next couple of quarters.

Signs of moderating growth are increasingly visible and this will mean a let up in the demand for commodities, including oil, which will have an impact on the prices of commodities. Together, these will give the policy-makers / central banks the leeway to take a more accommodative stance in monetary policy, which will possibly lead to a softer interest rate environment. These will be positive developments for the bond market.

What will be the maturity profile of the Flexi Gilt Fund?

The Fidelity Flexi Gilt Fund is so called because it has the mandate to invest in gilts of varying maturities. It is not constrained to invest in longer-term or shorter- term paper only. The fund will attempt to take advantage of the volatility in the market and identify anomalies in the yield curve to benefit from it. In the absence of any major change in the scenario where interest rates are expected to move up, the portfolio will be positioned defensively until we find the right opportunities. We continue to track the macroeconomic factors affecting yield movement, and the portfolio will be structured accordingly.

In the current scenario, would investors not be better off investing in money market/liquid funds?

I would say that it is an asset allocation decision — whether an investor chooses to invest in a gilt fund or park his money in liquid funds. Each has its own place and, for an individual investor, the overriding criteria for investing should always be his own financial goals, his risk profile and his investment horizon, rather than timing the market. It is as difficult to time the fixed income market as it is to try and time equities.

SHANTHI VENKATARAMAN
AARATI KRISHNAN

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