In interaction with Mahendra Jajoo, CIO – Fixed Income, Mirae Asset Investment Managers (India) Pvt Ltd

We are currently witnessing a rise in the benchmark bond yields. What impact does it hold on the bond market? 

Easy liquidity and low-interest rates had managed to keep the benchmark yields at decade-low levels. However, as the economy reopened gradually, India managed to outpace other nations by escaping the second wave. In view of quick growth bounce back, the central bank is likely to consider normalisation of the policy, which it has already indicated by restoration of cash reserve ratio (CRR) as well as by announcing liquidity operations. The high-frequency indicators of the economy signal a bounce back. To support this, the government announced large borrowings, and corporates are also expected to participate in this growth cycle thereby, creating a crowding-out effect. In summary, scaled-up borrowings by government and corporates may lead to rising yields and widening of spreads, proving a good opportunity for investors to lock in higher yields and attractive spreads. 

You have recently launched a corporate bond fund. Kindly brief us about the whole idea and also, tell us as to what made you launch this fund at the current juncture? 

As mentioned above, in this current situation, the yields are expected to rise. This also means that the yields of quality corporates will also rise. This provides a possible opportunity for a fund manager to invest in quality, high-yielding papers and lock in high carry. Investors, who choose to stay through the full rate cycle, are likely to benefit from the high yield as well as capital gains from the rate cut cycle that may follow. This makes the whole idea of investing in a corporate bond fund at this juncture lucrative.  

How does investment in corporate bond funds help investors and who should consider investing in them? 

As per the category mandate, corporate bond funds invest at least 80 per cent of their AUM in high-rated papers thereby, maintaining the quality portfolio. The other 20 per cent is towards tactical opportunities between the spreads and tenure. The balance between quality and duration offers consistent performance. Therefore, investors, who are looking for quality and stable accruals with a long-term horizon, should consider investing in this category.  

What impact does the benchmark bond yield hold onto the bond market and how should be the approach of debt mutual fund investors? 

Let’s try to understand this in a different way. Typically, when the equity markets are falling, the investors actively invest thinking that’s its correction and markets would return to the new highs. Similarly, when the yields are rising, it gives fund managers, an opportunity to buy quality papers at higher yields with an existing investible surplus, maturities, and new inflows. If an investor invests during the rising rate scenario and stays invested for an entire rate cycle, the returns during the rate cut cycle may have greater participation in the market rally. Therefore, rather than trying to get into the falling rate cycle, an investor should look for an opportunity for value investing. 

According to RBI’s Financial Stability Report and the latest MPC MoM, there is still some pain left for the banks. So, how does it impact the performance and risk of banking & PSU debt funds? 

High credit quality portfolios have gained further importance since the credit crisis that was witnessed in 2018, and maybe even before that. Many funds have suffered on account of credit events chasing performance through aggressive credit in that cycle. Since then, the industry and rating agencies have turned extremely cautious and wary of crisis. There could be temporary pain in banks, but funds & rating agencies would have to be vigilant of the credit quality as even through a phase of a tough macro environment, high-quality companies tend to survive and recover as one has seen time and again in the past. 

In the current bond market situation, what fixed income asset allocation should debt fund investors adopt? 

For long-term investors with an asset allocation approach, the best option might just be to stick to a disciplined approach rather than worrying too much about the market volatility. For those investors, who wish to take a tactical call or who are too worried about a possible increase in rates or higher volatility, the low duration category may be interesting. However, investors should consult an appropriately qualified expert or advisor for each specific situation.