The fixed income products may see volatility on account of the ongoing general elections, says Ritesh Nambiar of UTI AMC.
The fixed income products may see volatility on account of the ongoing general elections. However, global and local macro-economic variables remain favourable implying that rates would remain soft, making a case for investments in fixed income products, says UTI AMC’s Ritesh Nambiar. “Interest rates are expected to remain stable with some downward bias depending on evolving conditions in inflation (CPI) especially food inflation. Moreover movement in crude oil prices and results of general elections against market consensus would also have a bearing on rates going forward,” he said.
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Sushruth Sunder of Financial Express Online recently interviewed Ritesh Nambiar, Senior Vice President & Fund Manager, UTI AMC, who shares his outlook on the direction of interest rates, yield curve inversion, and factors to consider before investing in fixed income mutual funds. We bring to you edited excerpts.
Given that the election results are round the corner and stock market are expected to be volatile, do fixed income products provide a good opportunity for investors?
Volatility on account of general elections would be there across asset classes including fixed income products. That said both globally and locally macroeconomic variables are quite favourable for rates to ease thereby making a strong case for fixed income investments.
Global fixed income markets are volatile as investors fear a recession after yield curve inversion. Is this a common phenomenon?
US interest rate inversion between 3 months T bill and 10 year Treasury has created a fear of US heading to a recession. Fundamentally it is good omen for fixed income products across the globe. This inversion was a result of several factors such as Fed’s dovish signal over rate hikes in 2019, disappointing data from Europe, along with the uncertainty surrounding Britain’s exit from the European Union and US China Trade Pact. Fundamentally, 3-months T-bill rate is more influenced by current policy rates while 10-year treasury is more influenced by potential movement in inflation. In case of US, both have moved in opposite directions over last many quarters. That said this is not an uncommon phenomenon, the last yield curve inversion happened in 2007 before the subprime crisis.
What factors should investors consider before investing in fixed income mutual funds?
Typically fixed income funds are exposed to interest rate risk and credit risk. If an investor needs steady income generation with lesser volatility then he or she should invest in products with average duration of 0-3 years and average credit rating of AAA/AA+. If an investor wants capital appreciation with some degree of volatility then he or she could even opt for medium to longer duration fixed income products (greater than 3 years duration). Investors with higher credit risk appetite who are looking for steady income generation can even opt for credit oriented products.
Can you provide some broad guidelines for creating an asset allocation mix for retail investors? How much should retail investors allocate to fixed income mutual funds?
Broadly speaking every investor would have reasonable goals and milestones which he or she needs to fulfil through investment in the next 5-10 years. Depending on the long term historically performance of each asset class they should create an asset allocation which helps in achieving the set goals/milestones. Ideally it should be done through a financial planner. Allocation to fixed income mutual funds is part of such financial planning. There isn’t one ideal asset allocation meeting all investors’ needs.
What is the likely trajectory of interest rates going forward?
Interest rates are expected to remain stable with some downward bias depending on evolving conditions in inflation (CPI) especially food inflation. Moreover movement in crude oil prices and results of general elections against market consensus would also have a bearing on rates going forward.
We have seen a smart rebound in Rupee. What is the outlook for the domestic currency going forward?
Continuity of the government with strong mandate would continue the rebound in rupee. The near term rupee appreciation is more on account of dollar weakness which may sustain if US growth data disappoints.
(Ritesh Nambiar is Senior Vice President & Fund Manager, UTI AMC. Views expressed are author’s own)