With Reserve Bank of India’s interest rate policy stance changing to neutral from accommodative, yields will have stable to rising bias. Nagarajan Murthy, head of fixed income at Tata Asset Management in an interview to Saikat Neogi, says low duration strategy would help investors because of low price volatility and accrual income generation. Excerpts:
What would be the investment objective of Corporate Bond Fund?
Tata Corporate Bond Fund would be based on the Tata Asset Management credit philosophy and will take exposure to good quality papers. The investment objective of the fund is to generate returns over short to medium term by investing predominantly in corporate debt instruments.
How would the fund look at asset allocation?
Currently, there is a worrying possibility of rising interest rates. In such a scenario, our fund management view is that a low duration strategy would help on account of low price volatility and accrual income generation. The current portfolio strategy would be to keep a short average maturity, thereby limiting interest rate risk and may subject to change.
What was the need for the restructuring of Tata Corporate Bond Fund?
With interest rate policy stance changing to neutral from accommodative, yields will have stable to rising bias. In such an environment, Tata Corporate Bond Fund is positioned around lower duration spectrum with focus on accrual as well as credit quality. The fund would generate accruals by taking exposure to short-term corporate bonds of high quality issuers. Tata Corporate Bond Fund is suitable for retail investors who have a holding period of more than three months.
It would create a portfolio of corporate bonds and money market to take advantage of favourable yields present in the short end of the yield curve compared to the current repo rate of 6.25%. As the maturity of the portfolio is lower, it would benefit investors in a rising interest rate scenario.
Do you see any possibility of interest rates moving up now?
Given the change in monetary policy stance to neutral from accommodative and RBI’s continued thrust on maintaining CPI inflation at lower levels, interest rate seems to have bottomed out in current cycle. Further, best of the easy banking system liquidity—driven by ban on Specified Bank Notes (SBNs)—is behind us, with majority of currency making its way back into the economy. Bond yields are expected to be stable or have an upward bias as the Indian economy remonetizes. CPI inflation is expected to move up due to the implementation of 7th Pay Commission allowance, increase in minimum support prices and upward pressure from global commodity prices. However, FII flows and insurance demand is expected to be strong which should support bond yields.
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What type of investors should look at Tata Corporate Bond Fund?
Tata Corporate Bond Fund is well positioned for investors having at least three months of investment horizon and looking for high quality alternatives to one-year bank fixed deposits. The fund could also be used to park money before being invested in equity focused funds through SIP route.
How should investors invest in this funds and look at systematic transfer plan to invest in equity funds?
The fund is ideally poised for lump sum investment by retail investors. The fund’s prudent positioning on average portfolio maturity and credit stance makes it suitable for lump sum investment by retail investors. Additionally, no exposure to government securities helps in containing volatility. Debt investors seeking a low volatility suitable product for their saving needs can invest with investment horizon of three Months to one year and above. Equity investors who are worried about current high valuations and want to stagger their investments in equity with discipline can invest in the fund along with registering a systematic transfer plan (STP) from this fund to any equity fund of their choice from the bouquet of our equity funds.
Not only will this take care of their staggered investment into equity but also earn risk efficient debt returns on their debt portfolio. The fund has no exit load which is good for STP. Also investors can choose from daily, weekly or monthly frequency mandates for STP.