In conversation with Anand Nevatia, Fund Manager, Trust Mutual Fund

The Present Rate Hike Cycle Is Nearing Its End

"The Present Rate Hike Cycle Is Nearing Its End"

Anand Nevatia, Fund Manager, Trust Mutual Fund
 

With high levels of inflation cooling off, what kind of impact do you visualise in the bond markets and the yield curve in the short to medium term?
 

While the peak of inflation is behind us, it continues to be a concern as core inflation remains sticky at elevated levels. The Reserve Bank of India (RBI) is expected to hike rates by 25 bps in the forthcoming policy and then take an extended pause. The yields are thus expected to remain range-bound in the shorter term. Over the medium term, as and when there are signs of durable easing of inflation, yields can be expected to soften.
 

Could you shed some light on the investment philosophy behind the recently launched Corporate Bond Fund by Trust AMC?
 

Post rapid rate hikes by the RBI, the shorter end of the curve has reacted the most with corporate bond curve being almost flat one year onwards. As a result, the elevated credit spreads at the shorter have become attractive. The Trust Corporate Bond Fund is thus focussing to take benefit of these elevated spreads by investing in high-quality issuers with maturity in a 2-3 year bucket. The aim is to provide a high-quality portfolio with attractive yields but without exposing the investors to high duration risk.
 

How will the forthcoming rate hikes by the Federal Reserve and the high likelihood of recession in the US affect the Indian debt markets? Will high volatility persist in the bond markets over the next few months?
 

The FOMC has not indicated any deviation of its plan to take the Federal Reserve terminal rate to 5 – 5.25 per cent and hence the prospects of large rate hikes are low. At the same time, recession fears have also ebbed and hence a narrative of an early pivot may not hold. The Indian debt markets are unlikely to be subjected to any surprise volatility emanating out of actions of the US Federal Reserve.
 

How can fixed income instruments such as bonds help investors navigate volatility and stay invested with low risk?
 

Investors having a definite investment horizon with requirements of periodic cash flows can look to invest in bonds of high-quality issuers. These requirements can also be met through different mutual funds schemes. Basis the risk appetite investors can choose mutual fund portfolios across the yield and credit curve. While direct bond investments do bring in the benefit of absence of mark to market movements, mutual fund brings in the benefits of a diversified portfolio, ease of liquidity and the possibility of capital gains. Additionally, if held long enough, they also are more tax-efficient as compared to bonds.
 

Should investors in long Debt Funds and gilt funds stick to their investments during the current rate hike cycle or consider alternatives such as floating rate or short-duration funds to maximise their returns?
 

The present rate hike cycle is nearing its end and investors who have already invested in long duration should stay invested with a longer investment horizon. As and when the rate cycle reverses, the investments should yield attractive returns. However, they must stay prepared for some bouts of volatility in the interim.
 

How should a retail investor approach debt funds in the present scenario?
 

In the current rate hike cycle, a high-quality portfolio with select AAA-rated issuers can yield about 7.50 per cent with maturity of about 2-3 years. Such portfolios not only provide high yields, they are also low on duration risk. Such portfolios can provide stable returns and also prospects of possible capital gains. Investors should also consider taking exposure to long duration as and when the RBI appears convinced about inflation moving towards the target rate of 4 per cent. The right approach to debt funds should always with an aim of safe and stable returns without trying to be adventurous.