In conversation with Puneet Pal Head (Fixed Income), PGIM India Mutual Fund

Debt Funds Offer A Very Attractive Proposition To Investors

"Debt Funds Offer A Very Attractive Proposition To Investors"

What’s your outlook on the Indian debt markets and yield curve post the RBI’s recent rate hike in its policy rates? Also, how will the forthcoming rate hikes by the Federal Reserve affect the Indian debt markets?
 

We have seen bond yields rising post the Monetary Policy Committee (MPC) meeting on February 8 as the policy tone was slightly hawkish and the monetary policy stance of ‘withdrawing accommodation’ was left unchanged. We expect the yield curve to stay flat. Though we would attribute a high probability of another 25 bps increase in the policy repo rate, we think we are in the last leg of the interest rate hike cycle and policy rates are close to peaking out. Apart from domestic economic variables, global interest rates and movement in global bond yields impact the Indian interest rates and yields like any other emerging economy. The increase in Federal Reserve fund rates beyond 5.25 per cent can pressurise our yields upwards as currently the market is discounting a terminal Federal Reserve fund rate of 5.25 per cent.
 

What is your take on the Union Budget for 2023-24 and its impact on the 10-year benchmark bond yield during the fiscal year?
 

The fiscal deficit and the borrowing number announced in the Union Budget were in line with market expectations and bond yields have largely been steady post the budget. The budget numbers look credible and we believe that the government borrowing for FY24 will sail through comfortably.
 

How are you positioning your debt fund portfolios, particularly core debt categories like dynamic bond fund, corporate bond and banking and PSU fund in the current scenario?
 

As a fund house we are conservative on taking credit exposure and we try to generate alpha through duration management. We have been maintaining a conservative stance on duration since the last year and continue with a conservative stance. Our view is that rates could be on hold till the end of CY 2023 and we may get opportunities to increase duration over the next two quarters in the PGIM India Dynamic Bond Fund. In the PGIM India Corporate Bond Fund and the PGIM India Banking and PSU Debt Fund, we are running lower duration as compared to the benchmark and will gradually be increasing duration in the next 3-4 months. We will also increase allocation towards government securities.
 

Should investors in long-term debt funds and gilt funds stick to their investments during the current rate hike cycle or consider alternatives such as floating rate or short-duration funds to maximise their returns?
 

We would recommend investors to stick to their investments in long-duration and gilt funds category. We believe it is time for investors to increase allocation to fixed income since the current interest rate cycle is close to peaking out and the real yields are positive across the curve after an effective rate hike of 315 bps by the RBI since May 2022. We expect rate cuts to start from 2024 onwards and generally markets tend to price in future expectations well in advance. Hence, we would recommend investors to increase allocation to fixed income over the next 3-4 months.
 

At present, how should a retail investor approach debt funds?
 

Debt funds are often compared with traditional saving instruments. Debt funds offer a very attractive proposition to investors in terms of liquidity and tax benefits as compared to traditional saving instruments. Within the overall asset allocation, keeping in mind the current interest rate environment, we recommend that investors should increase allocation to fixed income mutual funds. The best time to invest in fixed income is when the rates are rising and are close to peaking out. Currently, in our view, interest rates are close to peaking out and hence it is an ideal time to build your fixed income portfolio. Investors should come in with a long term horizon of greater than three years and can allocate between short and long duration fixed income funds depending on their risk appetite.