'All investors should have both asset classes in their portfolio'- Killol Pandya, Daiwa Asset Management (India)

Killol Pandya, Head – Fixed Income, Daiwa Asset Management (India) tells Saikat Mitra about his investment philosophy and about debt fund management. With regard to the current macroeconomic situation in the country, he feels that there is a clear need to rationalise government expenditure and curb non-productive demand, while boosting government income by pushing through revenue generating proposals.
Says - 
Killol Pandya
Head – Fixed Income,
Daiwa Asset Management (India)

With respect to the Indian markets and Indian investors, how challenging do you find the fund management industry?

As such, the mutual fund industry in India has a long history but has picked up only in the last decade or so in terms of participants and volumes. After 2008, there has been a shift in the working environment of the mutual funds. The industry has evolved into a platform fit for serious and long-term players only.

Having said that, it is incorrect to say that the industry is overcrowded. The penetration of MFs beyond the metros is still very poor, and only a fraction of investors in India include MFs in their investment options. I believe that there is abundant scope for expansion in geographies beyond the metros and the inclusion of potential investors in the long run.

In the context of competition, the industry environment is quite competitive.
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There is a difference between managing funds on the debt side and on the equity side. What is the difference that you find while managing a debt fund?

The fundamental purposes of equity and debt funds are different. Debt funds endeavor to protect capital and provide regular returns. The risk appetite of a debt investor is significantly lower than that of an equity investor – this basic fact should be kept in mind by debt fund managers at all points in time.

At a functional level, the domestic debt markets are different from the equity markets. By and large, the Indian debt markets (especially the corporate bond markets) suffer from a lack of standardization and depth. Lack of liquidity is the most significant lacuna in debt markets. A debt fund manager, therefore, must not only manage the credit quality of the portfolio but its liquidity as well.

Do you follow any particular investment philosophy within Daiwa as a fund house?

The approach to debt investments is primarily guided by interest rate movements in the debt market. While following a bottom-up approach to investments in debt papers, due care is taken to reduce credit risk, liquidity risk and risk spreads. Further, as the debt instruments are not standardised, adequate analysis is done to understand the structure of the instruments and the risk-return potential before making an investment decision.

There have been many rounds of talks about the interest rates. What is your take on the interest front and how do you see it panning out going forward?

For some time, now we have held that the interest cycle has peaked. However, given the current circumstances of India’s macro-economic factors, the RBI may find it difficult to cut rates in the immediate future. Government borrowings, fiscal slippage and deficit concerns as well as global commodity price worries will continue to weigh on the domestic market. However, the rates cuts have already been initiated and it is only the timing of the future cuts that is a point of discussion. In context of our long-term economic growth estimates and our long term inflation trajectory, our medium to long-term view has an undertone of bullishness.

What is the impact that you see on the debt markets when the rates cool off?

Interest rates are inversely related to prices. Therefore, as rates cool off, investments made in debt instruments appreciate and experience gains. The extent of the gains depends on a variety of factors including the nature and credit quality of the security, residual life of the instrument, etc. It is also noteworthy that incremental investments made in times of lowering interest rates earn less in terms of yields and/or coupons, thereby affecting the future profitability of the portfolio.

Is this the right time to invest in debt funds?

As I mentioned earlier, we believe that the interest rate cycle in India has peaked. Rates cuts have already been initiated and it is only the timing of the future cuts that is a point of discussion. In such circumstances, I think it is a good time for investors with a medium to long-term investment horizon of say beyond six months to invest in debt instruments and products which can take advantage of the softening in interest rates.
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How long do you see this scenario prevailing?

In the current economic conditions, India is no longer isolated from global developments and the international economic scene has been stormy for many quarters now. Estimating long-term interest trends in such a scenario is tricky. Currently, we are seeing a very cautious RBI proceeding with rate cuts in a calibrated manner. We may see further activity in the new calendar year. I believe we may then expect to see a softening and/or soft interest regime for an extended period if the RBI continues with its policy of cutting rates in small doses and in a calibrated manner.

So, do you think that going forward there will be pull between the debt market and the equity markets for investors to choose between?

As I have mentioned earlier, equity and debt products have different risk-return profiles and serve different needs of investors. I don’t believe that an investor has to choose one asset class at the expense of the other. In fact, I think all investors should have both asset classes in their portfolio in accordance with their investment needs and risk appetite.

Going forward, how do you see the crude oil prices and gold prices panning out?

Crude oil prices have a significant bearing on the domestic markets since oil constitutes the single largest commodity imported by India. In recent times, crude oil prices have hardened somewhat, thereby adding to worries related with the increase in our fiscal deficit.

Broadly speaking though, I think brent crude prices may remain in the USD 100-120 per barrel (bbl) range for now. Gold, as a commodity, is more of an indicator of the mood and sentiment of investors. However, given the historical attachment Indians have had with the metal, we continue to import large quantities for private consumption. In that context, the import of gold ends up being a drag on the economy and does not directly result in economic productivity. Gold prices too have run up in the recent past on account of global cues as well as on increased demand due to the festive season. The depreciation in the rupee has also added to the upward pressure on gold prices. As of now, there is not much scope for a significant reduction in gold prices in the short term.

Can we expect something from the government now to set the ball rolling to revive the markets, or is the situation beyond repair?

The current Finance Minister had announced a series of fiscal measures and reforms which were part of the course-correction needed by our economy. These measures ranged from expediting legislations that have been held up for long, reducing the fiscal and current account deficits and taking steps to curb government expenditure. All of the steps announced were appropriate and the announcements themselves reversed much of the negative sentiment that had gripped investors in the previous quarters.

What is needed now is to implement the measures announced earlier. Acting on the plans will go a long way in reinforcing the credibility of the government and increasing investor confidence (especially that of foreign investors) in our economy. This is, of course, easier said than done. Nonetheless, initialising the reforms and measures announced earlier is the immediate need as far as the markets are concerned. In that context, I do not think that the economy is beyond repair. On the contrary, while the economy may be slowing down, we continue to be the fastest growing economy in the BRIC group after China.
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How fast do you think will the government be able to dissipate the twin deficit gap?

As mentioned earlier, bridging the fiscal and current account gap is easier said than done. From the perspective of the economy, the twin deficits are causing severe constraints and are hampering fiscal as well as monetary policy actions. However, the government too has to balance the pressures on inflation and currency with the need for economic growth, while also following its agenda of financial inclusion and development. We should also not forget that coalition politics entail complex situations that often lead to delays.

Having said that, there is a clear need to rationalise government expenditure and curb non-productive demand. On the other hand, government income too may be boosted by pushing through revenue generating proposals such as those related with FDI and divestment.

What is your advice to investors in the Indian markets at this juncture?

As mentioned earlier, our economy is slowing down. But given the bleak global conditions, we may continue to outperform many other developed and developing markets. We also hold that the interest cycle has peaked and it is only the timing of the rate cuts that is not known clearly. Given our long-term economic growth estimates and our long-term inflation trajectory, our medium to long-term view has an undertone of bullishness. In such market conditions, I think that for investors having a medium to long-term investment horizon of say more than six months, it is appropriate to go in for duration products such as dynamic bond funds, medium-term bond funds and PSU bond funds.

Disclaimer: The above views and opinions alone are not sufficient and should not be used for the development or implementation of an investment strategy. Information provided shall not be construed as investment advice to any party. Mutual fund investments are subject to market risks, read all scheme related documents carefully.

About

Killol Pandya has over 11 years of experience in the areas of fund management, portfolio development and analysis of securities. Apart from managing mutual fund schemes, he has worked in the areas of retirement benefit funds, fixed income dealing and proprietary debt portfolios. 

Education

MMS (Fin.), K J Somaiya Institute of Manangement Studies and Research
DPCM, ICFAI
B. Com, N M College of Commerce and Economics

Career

Present
Head - Fixed Income, Daiwa Asset Management (India)

Past
2003-2008 - Fund Manager - Fixed Income, SBI Funds

Management
2000-2003 - Fixed Income Dealer, IL&FS Investsmart
1999-2000 - Dealer, Darashaw & Co.