Bekxy Kuriakose, Head of Fixed Income at Principal Mutual Fund, chats with Morningstar's Ravi Samalad. She shares her views on what can be done to attract retail investors into debt funds as well as her outlook on the bond market.
What would be your advice to investors who wish to take a 3-year exposure to debt funds?
The markets may see a couple of rate cycles in a 3-year time frame.
Thus, our advice to investors is to have a balanced allocation across different categories of debt funds. They should invest a sizeable portion of their debt allocation to low duration funds (erstwhile liquid plus category), followed by short-term and dynamic bond funds. Apart from these three categories you have credit opportunities funds where the risk is a bit high. Depending on the risk appetite, investors can invest marginal portion of their debt allocation in such funds.
We would advise investors who are looking to invest in dynamic bond funds to wait till the Budget as it will give a clear picture of government borrowing and fiscal plans.
There is limited understanding of fixed income funds among retail investors. What should the industry do to simplify debt funds for retail investors?
Though retail participation in debt funds is inching up, retail investors are more attracted towards equity funds because of the double-digit returns. All stakeholders like Securities and Exchange Board of India (SEBI), Association of Mutual Funds in India (AMFI) and The Reserve Bank of India (RBI) should take some steps to increase awareness about fixed income as it will help investors bring some stability in their portfolio. For instance, there should be debt specific training programs in investor awareness seminars.
Further, the government has the power to offer some tax incentive in debt funds (Debt Linked Saving Schemes) which can be something akin to equity linked savings schemes (ELSS) at least for the first-time mutual fund investors. Once investors come into debt funds, they can experience the convenience, liquidity and low costs which will make them increase their allocation to mutual funds.
Today, SIPs are being associated with equity funds. So some amount of systematic investments, which are surplus, can be made into debt funds.
Where do you see bond yields heading?
As far as gilt yields are concerned we have had an exceptional year. There was a of a lot of supply which has come into gilt market primarily because of RBI’s open market operations (OMO) sale. Further, the government has announced extra borrowing of Rs 50,000 crore through dated securities which has been a surprise. It is higher than what the market was expecting.
A lot depends on the government’s roadmap for borrowing and fiscal plan for next year. Until there is clarity on the fiscal side, we could see some volatility in gilt yields. Gilt yields could go up further if the borrowing programme is higher than what the market is anticipating. We also have to see how inflation pans out. In 2017, we saw inflation bottoming out because of record low inflation, which was below 2%. The inflation has started moving up in 2018. We expect the next Consumer Price Index (CPI) figure to be above 5%.
The other factors where we have to be cautious is short term rates. In 2017, the short-term rates were very stable because the banking system had surplus liquidity due to demonetization and the overnight rates were very stable. The short-term rates have started moving up very recently. There can be some volatility in short-term rates because liquidity is drying up. We also have one more uncertain factor which is bank recapitalization bond, the details of which are awaited. Overall, we are exercising caution this year as we are expecting more volatility in bond yields.
Do you think exchange traded funds (ETF) structure can work in the Indian fixed income category?
Stock exchanges are trying to develop fixed income ETFs. The biggest hurdle in fixed income ETF is liquidity and replicating the portfolio. Today, a five-year corporate bond issue is active for the first 10 days and becomes illiquid after that.
That said, the government securities market is liquid. Even within government bonds, three to four securities like the 10-year benchmark corner 80-90% of liquidity. The liquidity is absent in other securities.
The certificate of deposit (CD) and commercial paper (CPs) suffer from the same problem. In fixed income, liquid is the biggest category followed by liquid plus schemes. These schemes invest in CDs and CPs. So secondary market liquidity is an issue. This is the main problem when constructing a fixed income ETF. If the investor wants to buy an ETF and the fund manager has to replicate the portfolio exactly as per the component of that ETF in the same proportion, the fund manger may be able to buy gilts. But buying the exact instruments in CD and CP becomes a challenge. We need to surmount this hurdle.
To overcome this, SEBI is trying to increase secondary market liquidity. It has issued a circular on consolidation and re-issuance of debt securities. Trading in gilts is already electronic and the regulator is trying to extend it to corporate bonds. We will see the results of SEBI’s effort in a couple of years.
How is SEBI’s new fund categorization rule affecting your strategy? Since SEBI has created 16 sub-categories in fixed income, are you looking to launch new funds?
We did not have any duplicate funds in one category. We will have to rechristen some funds and change their investment strategy to meet SEBI’s requirement.
There are some fund houses who have multiple funds within one category. They will either have to merge their funds or put them in another category. When we evaluated our funds, we found that there are product gaps.
Until now, launching new funds was time consuming. There was a lot of back and forth while dealing with SEBI. Once all AMCs have their products in different categories, new fund offer (NFO) approvals will get faster.
