Investors should have 50% of allocation to debt funds, says CEO of Aditya Birla Sun Life AMC

By: and | Updated: August 1, 2018 12:18 PM

One should expect another 50-basis-point rate hike in the current financial year, says A Balasubramanian, CEO at Aditya Birla Sun Life AMC Limited.

Investors should have 50% of allocation to debt funds, says A Balasubramanian, CEO of Aditya Birla Sun Life AMC

One should expect another 50-basis-point rate hike in the current financial year, says A Balasubramanian, CEO at Aditya Birla Sun Life AMC Limited. In an interview with Chirag Madia and Tushar Goenka, he further emphasises that mutual funds are not only about equity funds, and says even debt funds play an important role and investors should have 50% of their allocation to various debt funds. Excerpts:

What is your expectation of the current RBI policy and what is your outlook on debt markets?
The macro variables, especially the inflation post the recent increase in minimum support price (MSP) and recent swing in oil prices point towards increase in inflationary outlook. With an increase in current account deficit which is close to 2.50%, the Indian currency too briefly came under pressure. These developments are pointing towards policy rates going up. Whether it happens in the August 1 policy meet or in the next policy is not much of a concern. Broad macro trends seem to provide sufficient rationale for the Reserve Bank of India (RBI) to consider a rate hike. The question whether it will be in the forthcoming policy or later would depend upon how the impact of monsoon is going to shape up.

Do you see more rate hikes in the current financial year?
Our estimate is that one should expect another hike of 50 basis points (100 basis points=1 percentage point) in the year 2018. Having said that, bond market and government securities market have factored in the rate hike. After some time, yield movements are driven by not just only rate hike but also the liquidity. So liquidity in the system is currently in short supply on the back of currency outflow. In the last few months, we have seen a dip in forex reserves on the back of outflow from Foreign Portfolio Investors (FPIs) and reduction in FDI flows. However, in relation to the Emerging Market, Indian currency has behaved well, may be due to the Reserve Bank of India’s intervention at the appropriate time. And at the same time, conviction on India still remains better among the emerging markets.

Where can 10-year yields settle down?
In the last one year, 10-year government bonds have gone up from 6.45% as of July 31, 2017 to as high as 8% on June 7, 2018. Such a big shift in the yield curve was perpetuated by rising inflation led by oil prices and global interest rates going up. Change in macro variables for India also got impacted post the rise in crude oil prices. However, the bond market seems to have discounted all the negatives ahead of RBI rate hikes and also post getting a clue from change in stance in the last few policies. The market is also influenced by the government’s borrowing calendar which seems to have been more at the shorter end so far. However, issuance of bonds have been at the segment which market players can absorb; thus having less volatility on the bond yields post touching 8% level. Therefore, it appears bond yields should stay more or less range bound close to 8% with plus or minus 15 basis points movement either side.

What strategy should investors adopt now for debt funds?
I think investors should have fixed income as an essential part of their asset allocation. Mutual funds are not only about equity funds. Even debt funds play an important role. For example, if investors make Rs 100 investment into mutual funds schemes, 50% can go to equity and the remaining in debt funds. Historically, we have seen that whenever yields are near 8-9%, debt funds generate good experience to investors due to the elevated yield curve. Within fixed income bouquet of products, one can park his money in liquid funds without getting worried about credit or interest rate movements. Even short-term debt funds could also be part of the consideration as yet another option.

Mutual funds offer another category called interest accrual funds with two different kinds of approach. One category is like investing in high quality corporate bonds ranging from AAA to AA- rated companies. While the second category is aggressive in nature from the credit selection point of view, the careful selection of bonds with built-in safety mechanism makes this fund also, one of the choice for allocation. Having said that, it is always advisable to have meaningful allocation to high quality corporate bond funds on one side and some allocation to credit related accrual funds. Today when interest rates are quiet reasonable compared to bank fixed deposits from investors’ point of view, it could be worthwhile for investors to consider Fixed Maturity Plans (FMPs) for three years and beyond.

Recently markets regulator Sebi had raised concerns over various malpractices in the mutual fund industry. What is your view on this?
The Securities and Exchange Board of India (Sebi) keeps monitoring various practices of the mutual funds industry along with other capital market-related areas. Given the fact investors’ interest play a dominant influence in the regulator’s mind, it is obvious to expect regulatory intervention even in the nature of, what I call oral intervention. It also does bring an orderly functioning of the industry. Recent observation from Sebi is derived from the External Audit observation of all mutual funds and such observations have been taken up by the industry players in order to put systems in place in the best interest of themselves as well as investors. It is always worth to keep a check on ourselves given the fact Mutual Fund industry is emerging as a large intermediary in the financial market. It has also earned the respect of managing money efficiently in the best interest of investors and hence any intervention from the regulator have to be seen in a positive light.

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