In an interaction with Marzban Irani, Chief Investment Officer – Fixed Income, LIC Mutual Fund

In this interview, Marzban Irani, Chief Investment Officer – Fixed Income, LIC Mutual Fund, takes stock of the current market situation and shares some tips for investors with their sights on mutual funds

The MPC has kept the interest rates unchanged at 6.5 per cent three times in a row. What is your present evaluation of inflation and interest rate trajectory?

The two big risks that I am watching closely are EL Nino and crude prices. As pointed out during the MPC meeting, inflation has increased mainly because of the food prices. Food inflation is cyclical in nature and doesn’t last long. No more than monetary measures, it’s the fiscal measures which help to bring down food inflation. The government has taken the necessary measures for the same. The last headline number has shown a declining trend and core inflation has been around 5 per cent. Hence, any rate action will be data-dependent going ahead.

What is your take on ICRR and how has it impacted the debt market?

ICRR was introduced to absorb excess liquidity due to higher inflation. After its introduction the short-term rates of money market instruments overnight have inched upwards.

How will the rising crude oil price and strengthening of the USD impact the debt market in India?

India is a net importer of oil. Hence, rising crude oil prices are a concern. It will keep headline inflation high and put pressure on fiscal. Strengthening USD puts pressure on domestic currency. However, this will not be a big challenge on account of the comfortable reserves on the domestic front. Also, some comments from the Federal Reserve members that they need to wait and watch and not hike are comforting.

Given the various regulatory and taxation changes that have occurred in the debt mutual fund category, do you anticipate a shift of investors towards traditional options such as bank fixed deposits (FDs) or other fixed income instruments?

Now the debt mutual funds taxation rules have been brought on par with fixed deposits and so both have reached a level playing field. Still, debt mutual funds provide additional benefits like liquidity (penalty in case of premature withdrawal of FDs whereas most of the debt MFs have no exit load) and transparency in the holdings of debt securities which are published on a fortnightly basis. The real estate sector may benefit from this development due to the presence of indexation benefit, but the ticket size is high in this sector.

Given the rising yields, what would be your advice to retail investors who want to invest in Debt Funds?

I have been advising investors to enter debt funds as the yields are attractive at the absolute levels. At the moment, carry is attractive and going ahead as the rates decline there will be capital appreciation. Therefore, based on individual risk appetite and time horizon one should invest in debt.