While FDs are attractive at the shorter end, those with a long-term view should bet on debt funds as they stand to benefit from indexation. In an interview to Siddhant Mishra, Marzban Irani, CIO-Debt at LIC Mutual Fund, says that with rates close to peaking, 7.5% is an attractive carry that investors shouldn’t miss out on. Excerpts:
Have we reached an inflection point in terms of rate hikes?
Yes, most of the rate hikes are done now, and we have been giving this call since July 2022 that yields have peaked. We noticed that from the time that Dr Raghuram Rajan left in 2016-17, up to now, yields have usually been below 7.75%.
In 2022, when the domestic rate hike cycle started, there was a sudden surge in yields. There were fears of the same crossing 8%, but we were confident it won’t cross 7.75%. We say 7.0-7.5% is a good level to enter the market. When we rolled out 10-year products, questions were raised about impending rate hikes. But we knew that notwithstanding rate hikes, yields wouldn’t surpass 7.75%. Currently, we could see one more hike based on the Fed action, but that’s all.
Has yield to maturity peaked?
YTMs have peaked as far as G-Secs are concerned. With the Centre having to spend on infrastructure, health, and education, they have seen the need for capital, and thus the ensuing high yields. In terms of corporate bonds, while corporates haven’t undertaken a high level of capex, we have still seen good credit offtake. And, spreads between government and corporate bonds are not too wide, compared to earlier times. Further, demand levels have also increased.
Earlier, demand was from large entities. Now, with pension funds becoming popular, there is demand from such entities too.
How do you see duration funds?
Every investor has a different time horizon, based on their risk appetite. We have different products for different time horizons. With interest rates declining over a structural manner, the longer you invest, the better.
With rate hikes likely to continue, will we see investors turning to overnight/ultra-short duration funds till there is clarity on a pause?
There are two aspects to this. The duration or longer term funds are impacted by changes to the policy rate, while the shorter duration funds are impacted by the liquidity in the system.
Excess liquidity would mean lowering of yields, while any tightening of policy would lead to a spike in yields. At present, the RBI has indicated maintaining a neutral level of liquidity, which means such short-term funds will continue commanding a decent yield while liquidity comes into the system.
How do you see debt funds performing in the backdrop of rising interest rates?
This is the ideal time to invest in debt funds. For the last two years, we have seen 4%-level accruals owing to the excess liquidity in the market. Now, accruals are at more than 7.5%, an opportunity too good for investors.
Rates will remain high this year, and 7.5% is an attractive carry that investors shouldn’t miss out on.
What has made money market schemes stand out?
Money market schemes have seen huge inflows from the banking channels. Funds that had exited earlier because of the rate uncertainty are finding their way back. With banks and corporates realising that rates have stabilised, they are entering these categories. One-year rates are very attractive, which explains the inflows into this category.
Mop-ups via NFOs fell 31% in 2022 vis-à-vis 2021. Why so?
There were not many major FMPs launched, given the rate uncertainty. But now, with yields correcting, target-maturity funds have seen yields edge higher. People are showing higher interest, and it’s the right time to encourage more people to get into fixed income.
With banks hiking deposit rates, investors are getting an alternative to park their funds in. Your view?
FDs are attractive at the shorter end, and bank deposits offer competition only at the shorter end. Given that there was not much credit offtake in the past two years, the surge in offtake this year led to a hike in deposits.
At the shorter end, while FDs are attractive, at the longer end, MFs make sense as you get indexation benefit after three years.