Amid heightened volatility in the stock market, even as investors may be looking for safer options, Tata Mutual Fund’s Murthy Nagarajan says that nearer the future obligations, higher should be the allocation to fixed income products. Investors need to keep at least 12 months of their recurring expenses in Fixed Income, he adds. According to the expert, investors should look at duration category of the mutual fund and at the same time consider the credit quality of the schemes while investing into fixed income mutual funds.
Sushruth Sunder of Financial Express Online recently interviewed Murthy Nagarajan, Head-Fixed Income at Tata Mutual Fund, who shares his outlook on inflation; factors to consider before investing in fixed income mutual funds; trajectory of interest rates; and guidelines for creating an asset allocation mix for retail investors. We bring to you edited excerpts.
What impact will the recent Budget, along with the rate cut by RBI likely have on inflation?
Budget was inflationary in nature. Interim Budget announced cash benefits to 12 crore farmers, 1.2 crore fishermen and around 2-3 crore middle-income families. The budget has proposed to transfer cash of Rs 6,000 per year (in three equal installments) effective December 2018 to farmers with less than two hectares land, which is about 12 crore farmers and entails extra spending of Rs 75,000 crore in FY-2020 and Rs 20,000 crore in the current financial year. The middle class also got a tax break – for those earning up Rs 5 lakh annually, a rebate on tax paid will be given (a total outlay US$ 250 crore). To that extent, consumption growth – which has been generally in good shape – gets a further kicker in the coming months. All these factors, despite being positive for GDP growth by giving boost to consumption will weigh on inflation (especially the core component).
In February Monetary Policy, there was sharp U-turn in RBI’s assessment of India’s Growth and Inflation. In previous policy statements, RBI had highlighted that output gap has virtually closed and there are upside risks to inflation (especially on Core side). In February Policy, RBI has seen through the expansionary budget, as well as sticky core inflation, and viewed the recent softness in inflation prints as “opening up space for policy action”. With both fiscal and monetary stimulus becoming loose, we feel that medium term outlook of inflation has worsened.
What factors should investors consider before investing in fixed income mutual funds?
Last year has been an eventful one. Investors witnessed heightened volatility in interest rates and there was some stress in credits as well. Fixed Income Mutual Fund Schemes carry two types of risks: Interest rate risk and Credit Risk. Investors should look at duration category of the fund and at the same time consider the credit quality of the schemes that he is considering.
Can you provide some broad guidelines for creating an asset allocation mix for retail investors? How much of the portfolio should retail investors allocate to fixed income mutual funds?
Investors need to keep at least around 12 months of their recurring expenses in fixed Income. The allocation between fixed income and other asset class will depend on the individual investors financial position and future obligations. The nearer the future obligations, higher should be the allocation to fixed income to meet these obligations. Broadly, Investors above 50 years of age, should allocate around 25 %to 35 % of the investable corpus in debt.
What is the likely trajectory of interest rates going forward?
The RBI has seen through the expansionary budget, as well as sticky core inflation, and viewed the recent softness in inflation prints as “opening up space for policy action”.
Although higher gross supply from government of India will continue to weigh on market, we believe that February policy was much more dovish than market expectation. RBI’s assessment of inflation trajectory going forward suggests that today’s policy rate cut was not an isolated one and going forward if inflation doesn’t surprise meaningfully from current trajectory, there is room for further easing. In addition to easing on policy rate rates, RBI also indicated that it will continuously monitor durable liquidity needs of the economy and will continue to infuse liquidity through OMO purchases.
Post policy, we remain constructive on fixed income. Near-term demand supply dynamics might weigh on yields temporarily but upside will be limited as market will start factoring in more easing going forwards and expectation of early start of OMOs. We expect 10-year Gsec benchmark to trade in the range of 7.15%-7.45% in near term and maintain steepening bias on the yield curve.
(Murthy Nagarajan is Head-Fixed Income at Tata Mutual Fund. Views expressed in the article are his own. Please consult your financial advisor before making any investment related decision)