Inflation within the medium-term target of 2% and strong labour market conditions could be strong reasons driving the future rate hikes in the US. Federal projects the policy rate at 3.1% at the end of 2019 as compared with 2.9% seen in March' 18 and 3.4% in 2020. This will directly impact the emerging markets like India, points out Avnish Jain, sceptically.
The ratio of debt in one’s investment portfolio depends on a number of factors like a person’s goals and aspirations, stage of life cycle, liquidity requirements, the need for steady cash flows et cetera, says Avnish Jain, Head of Fixed Income at Canara Robeco Asset Management Company, Robeco’s joint venture in India. In an exclusive interview with Nishita Nathani of FE online, Avnish Jain shared his insights that amidst the hike in the interest rates to trending global crude oil prices to domestic macroeconomic concerns, having a longer-term horizon for your investments is likely to generate better risk-adjusted returns. Talking about the global trends to dispensing investment related wisdom to the new players, here are the edited excerpts of the interview:
The past trends in the market have been volatile. What is your suggestion to risk-neutral investors aiming for more than risk-free returns?
On the global front, going forward, a future hike of the interest rate by the US Fed could largely depend on a variety of factors like the sustained expansion of the US economy, inflation panning out across the globe, trade wars and the panning of crude oil prices. Inflation within the medium-term target of 2% and strong labour market conditions could be strong reasons driving the future rate hikes in the US. Federal projects the policy rate at 3.1% at the end of 2019 as compared with 2.9% seen in March’ 18 and 3.4% in 2020, unchanged from the prior forecast. These will directly or indirectly impact the volatility in the emerging market space and India is no exception. Domestically, with RBI maintaining a neutral stance, the market seems to believe that the current rate hike cycle is likely to be short. The rupee has held firm above 67 to the dollar and such a rate hike can send a signal for foreign investors that the returns in India could be going up, thereby increasing the flow of funds into the Indian debt markets.
The Indian fixed income market could, however, remain cautious over factors such as the distribution of a normal monsoon, domestic currency movement and the trend in global crude oil prices which could result in the market being volatile. Future RBI actions and uncertainty ahead of 2019 general actions are likely to keep the markets on the edge. Amidst concerns surrounding global trade and geopolitical issues as well as domestic macro fixed income, markets are expected to remain volatile in the near term. Having a longer-term horizon for your investments is likely to generate better risk-adjusted returns.
How shall a new investor decide which fixed income funds to invest in? What are the most important factors?
There are generally two risks in fixed income: Duration risk and credit risk. Duration risk emanates from securities having higher maturities whilst credit risk emerges from investing in lower-rated issuers. For a new investor, it is advisable to minimize these risks by investing in short-duration funds having high-quality portfolios. High-quality portfolio means having high exposure (about 70-80%) to sovereign bonds / corporate bonds having ratings of AAA/AA
Equity mutual funds have given an average effective annual return in two-digits in 2018. Why should return-oriented investors consider fixed income investment in their portfolio?
From a portfolio risk perspective, it is generally advised to diversify across various asset classes, including fixed income. While fixed income returns may be lower than equity, the volatility is much lesser than equity returns. Further, various asset classes may perform in different periods of time and one may need exposure to more asset classes to optimize returns over longer periods of time. There may be liquidity requirements on a periodic basis, where short-term debt funds like liquid funds may be good avenues of investment. Hence it is advised to diversify one’s portfolio across other asset classes
How shall one go about deciding the ratio of debt/ fixed income in one’s portfolio?
The ratio of debt in one’s portfolio may depend on a number of factors viz. a person’s goals and aspirations, stage of life cycle, liquidity requirements, the need for steady cash flows etc. For example, a person who is just starting his career may invest the bulk of his portfolio in equity as his requirements for steady cash flows may be low and he would be looking towards long-term wealth creation. For a person near retirement/retired, preservation of capital is paramount as there is no steady income from a job. The wealth creation may have already happened and there is a requirement for monthly cash flows. Hence this person should have a bulk of investments towards fixed income. Generally, as a person ages, his fixed income allocation should gradually increase.
How are a person’s goals and aspirations related to the allocation of fixed income instruments in their portfolio?
A person’s goals and aspirations will define how the portfolio is structured and allocation to asset classes like equity and debt. For example, a person may have longer-term goals like owning a house within a certain time, saving for children’s higher education and marriage, their individual retirement planning etc. His shorter-term goals may include owning a vehicle, yearly vacations, maintaining a certain lifestyle etc. Longer-term goals are likely achieved through wealth creation by investing in equity markets (directly or indirectly). Investment in fixed income products generally helps in managing the shorter-term goals as these investments provide moderate returns with lower volatility.