Don’t Be Affected By Short-Term Performance

• Rising rates are offering a good opportunity to investors who have a slightly longer-term investment horizon.
• We have been stressing upon the asset allocation approach to design a portfolio where debt is an integral part. There are a variety of products offered, starting from Liquid Funds/Ultra Short-Term Funds as a substitute for a savings bank account, FMPs as a tax-efficient alternative to FDs, and Short-Term and Long-Term Income Funds to provide income along with stability to the overall portfolio.
• Our advice to investors would be to consider debt funds as an integral part of their portfolio, as it provides both stability as well as higher risk-adjusted returns on a long-term basis.

Sudhir Agrawal
Fund Manager
UTI Mutual Fund

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

In case of a mutual fund investment, we see some of the investors paying undue attention to the daily NAV movements. This particular investor behaviour makes it difficult to execute investment calls at times, as it takes some time for the fundamentals to play out. This sometimes results in the focus getting diverted to very short-term performance at the cost of long-term performance of the fund.

Debt funds are not as popular among retail investors as equity funds. As a fund management house, what are you doing to popularise debt funds?

While communicating with our investors/distributors, we have been stressing upon the asset allocation approach to design a portfolio where debt is an integral part. There are a variety of products offered, starting from Liquid Funds/Ultra Short-Term Funds as a substitute for a savings bank account, FMPs as a tax-efficient alternative to FDs, and Short-Term and Long-Term Income Funds to provide income along with stability to the overall portfolio.

What is the right strategy to invest in debt funds, especially when interest rates are rising?

One should consider investing in Short-Term Income Funds, as the short-term rates are expected to come off from here, with liquidity remaining comfortable. Investors can also consider investing in Income Funds with an 18-24 month investment horizon, as these funds offer good accrual because of high absolute yields. Overall, the rising rates are offering a good opportunity to investors who have a slightly longer-term investment horizon.

The bond markets have not developed as expected. What, according to you, has gone wrong, and what steps should the government or the RBI be taking to develop it?

The liquidity in the bond market has not been very encouraging despite several efforts made by the regulators. However, the recently announced step to launch cash-settled interest rate futures (IRFs) is expected to provide an effective tool to hedge the interest rate risk, which may have a positive impact on the bond markets.

Do you think that there are more limitations for a debt fund manager as compared to an equity fund manger?

Unlike in equity, we do not have a widely followed index for the debt markets, which makes it difficult to benchmark the portfolios to the index. In the absence of an index, you are supposed to underweight/overweight to a peer set whose portfolio is unknown and may change overnight. Apart from this, the corporate bond market is not very transparent and liquid unlike the equity markets. Also, till now, there is no effective hedging tool available to hedge the interest rate risk.

There is lot of talk with regard to increasing the FII limit in debt funds. How is this going to impact the debt market?

The FII limit may need to be revised upwards, as the government is trying to get the Indian bonds included in the global bond indices. If it happens, we may see increased demand for Indian debt and may see the yields falling significantly from the current levels, resulting in a sharp rally in the debt markets.

What advice would you like to give investors in the Indian markets at this juncture?

We will advise investors to give more time to their investments with mutual funds and not be affected by the performance in the very short-term. As in the case of FDs and endowment insurance plans, mutual fund investments should also be looked at in terms of their long-term performances. Daily NAVs are there to increase transparency and should not be used to compare the day-to-day performance. Also, our advice to investors would be to consider debt funds as an integral part of their portfolio, as it provides both stability as well as higher risk-adjusted returns on a long-term basis.