"With both the US Fed and the ECB set to implement the next round of quantitative easing by buying bonds and assets from banks" Ganti N Murthy

“This is the right time to invest in debt funds. With the interest rates set to come down, bond funds or debt funds in the medium-to-long duration segment would give higher returns than funds of any other asset class. So, investors who have an investment horizon of over one year should invest in debt funds.”

GANTI N MURTHY 

Head – Fixed Income (Peerless Mutual Fund)

With an experience of over 19 years in the Indian mutual funds industry, Ganti N Murthy, Head – Fixed Income at Peerless Mutual Fund, brings with him a treasure of knowledge. He has been associated with Peerless since the inception of the fund. In an interview with Saikat Mitra, he shares with us his take on the domestic and global economic conditions, the debt markets and what investors should be doing in the present scenario.

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

Fund management is a challenging job in the Indian markets as compared to the global markets. Our market is yet to come to the standards of the global markets in terms of infrastructure and integration with the global markets. The markets are highly regulated and the number of new products is restricted. Managing funds with these constraints is challenging.

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?

Equity markets are much more developed and transparent than debt markets in India. The equity markets are better managed, with huge liquidity and ease of transaction. The debt markets have not yet come up to the stage of the equity markets. The markets are not very liquid and are highly regulated by multiple agencies. Debt markets are mainly institutional in nature, while equity markets are more retail in nature.

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

Interest rates in the Indian economy are a function of inflation and liquidity. With the economy showing signs of slowing down and inflation slated to come down as a consequence, so will interest rates.

In the current scenario, interest rates are expected to come down in the next six months to a year. Inflation is set to come down due to the monetary policy followed by RBI over the past two years and with the economy showing signs of a slowdown. The RBI, which had followed a policy of interest rate tightening over the past three years, reversed its policy in March this year and started slashing rates. They first cut the CRR, then the repo rate and finally the SLR to increase liquidity in the banking system and to ensure that the yields on securities come down.

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

Keeping in mind the interest rate scenario, we expect the bond yields to fall from the current levels by about 50 basis points over the course of the next one year. In such a scenario, bond funds which play in the medium-to-long duration would generate higher returns than funds of any other asset class. So, investors who seek to generate above average returns should allocate a higher percentage of their investible corpus in debt funds.

Is this the right time to invest in debt funds?

Yes, this is the right time to invest in debt funds. With the interest rates set to come down, bond funds or debt funds in the medium-to-long duration segment would give higher returns than funds of any other asset class. So, investors who have an investment horizon of over one year should invest in debt funds.

How long do you see this scenario prevailing?

This scenario would continue for the coming nine months to a year. It would prevail till the RBI maintains an accommodative policy so that the GDP growth reverts back to its potential rate.

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?

Well, at this moment I will not be able to comment on the same.

So do you think that going forward there will be a pull between the debt market and the equity markets for the investors to decide on where to invest in?

No, I do not think that there will be any kind of tussle between these two markets.

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

Not really. The short-term markets are pretty deep, and I do not think that there are limitations as compared to equity fund managers.

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

With both the US Fed and the ECB set to implement the next round of quantitative easing by buying bonds and assets from banks and pumping money into the economy, such excess money supply would find its way into assets like gold and oil futures, which would increase the price of both.

How do you see the recent government action impacting the market?

The government has started to announce policy measures, which would set the ball rolling and keep the markets in a positive mood. The recent price hike in diesel and the cap on the usage of LPG cooking gas would, to a certain extent, contain the fiscal deficit. Other policy measures like FDI in various sectors of the economy would go a long way in improving investor sentiment and showing investors the intention of the government to keep economic growth from falling below the potential growth levels.

How fast do you think the government will be able to dissipate the twin deficit gap?

The intention of the government has to be there. We recently saw the intention of the government to address the issues at hand. Tackling the twin deficit issue requires not only freeing the economy in many sectors, but also the zeal of the government to curb wasteful expenditure.

What is your take on the Euro zone crisis?

The Euro zone should see below average growth during the current year, with countries like Spain and Italy hanging between default and survival and the big two – Germany and France – having their own problems to sort out before helping other economies in the region. There have been recent measures by the ECB to buy unlimited bonds from the market and Germany finally agreeing to fund the EFSF (European Financial Stability Fund) should the immediate problems dissipate. The future would depend on whether each country in Europe would be ready to cede fiscal sovereignty to the ECB or not.

How does it impact our markets?

We should see our equity markets being positive due to the measures taken by the US Fed and the ECB.

What do you advise investors in the Indian markets at this juncture?

At this juncture, we would suggest that investors park a portion of their surplus to debt and bond funds in order to reap the benefits of the fall in interest rates.