Interview With Dwijendra Srivastava, Head - Fixed Income, Sundaram Mutual Fund

Dwijendra Srivastava
Head - Fixed Income
Sundaram Mutual Fund

If the flow issues are addressed in time, we see the rupee stabilising between the 60-62 levels. But if the issues are not addressed, we may see the INR touching the 65 levels or even worse.

Please take us through your journey in the Indian markets.

My journey in the Indian markets started off when I joined Tata Mutual Fund, where I dealt with duration funds, looking after the government securities transactions in all the funds across the company. This gave me an insight into the volatility in interest rates. At the longer end of the curve, you witness highest volatility and you need to express your views on interest rates in the markets.

Then I went to JM Mutual Fund, where I first got the chance to manage liquid funds. Here, I was able to learn about subscription and redemption pressure and take a view on system liquidity, which ultimately drives the shorter end interest rates in conjunction with the outlook on the signaling rate viz. repo rate. It has been a fulfilling journey, but you have to continuously be on your toes to decipher the interest rate cycle and liquidity cycle.

With respect to the Indian debt markets and investors, how challenging do you find the fund management industry?

Challenges are found across the globe when you talk about the fund management industry. On the fixed income side, the challenges are more on the subscription and redemption side in a country like India, where the major chunk of funds are invested in liquid and liquid plus funds which form around 40-45 per cent of the industry assets. The challenge is to manage the fund as per the given mandate. 

The other challenge that we face at this point in India is the volatility in interest rates. This is currently much higher than what it used to be in the recent past. The volatility has thrown a challenge to fund manager to understand the changing landscape of the markets.

What is the difference between managing funds on the debt side and on the equity side?

Well, this is a bit of tricky question as I have not managed equity funds till date. But with my experience in the markets, what I understand is that in the equity markets you need to stay ahead of the benchmark indices. Stock picking is the priority, but the universe is huge. On the fixed income side, you have more of a macro approach and then you choose your instruments and tenures to execute your view. On the equity side, the investor hardly bothers about credit quality, while for fixed income, safety of investors’ money is the priority.

Debt funds are not as popular as equity funds among retail investors. As a fund management house, what are you doing to popularise debt funds?

Sundaram Mutual Fund has a retail DNA. What we try to do is to engage with the investor, not only from the fund management side, but also from the sales and customer service side. We try to educate investors as far as possible. We try to reach investors through different publications, and they read our views and formulate views on their investment targets. We also undertake various investor conferences targeted at retail investors.
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Do you follow any particular investment philosophy at Sundaram Mutual Fund?

Well, we do not really follow any particular philosophy for managing funds. However, to put it succinctly, mutual funds are supposed to be the market for retail investors. So, the philosophy is to manage their money by following whatever strategy is required to manage their money as per the respective fund’s mandate. In general, we do not take undue risks and we are a little conservative on the credit calls that we take.

Moving on to the current developments, can you shed some light on the depreciating INR scenario?

What has been happening with the INR started off with higher government borrowing. Basically, the rise in the fiscal deficit is the reason behind rising inflation. Growth plunged following that, adding to the woes. That in turn widened the Current Account Deficit (CAD) beyond sustainable levels. As India is a net importer and most of the imports are inelastic, the INR has weakened. This is the macro weakness that India is facing right now. When we compare it with the emerging markets economies, India is at the bottom five.

The country is already facing the challenge of twin deficits. But at this time, the INR is getting affected due to strengthening in the USD. Going forward, if QE tapering actually happens, it will have a second round effect on markets across the globe. This is the key risk that we see.

India has a month before the next FOMC meet, and the flow issue must be addressed in this time. If that happens, we see the rupee stabilising between the 60-62 levels. But if the issues are not addressed, we may see the INR touching the 65 levels or even worse.

How fast do you think the government will be able to dissipate the twin deficit gap?

We have come to a situation where managing both is the need of the hour and with urgency.

In your view, how will the interest rates pan out going forward?

At the moment it is a Catch-22 situation – while a large CAD does not give room for a rate cut, the growth woes cry out for an easy monetary policy. Clearly, the central bank considers the external situation more of a problem. In the short term, as rightly pointed out by the RBI, growth has to be sacrificed to take care of current account funding. We expect the interest rates to stabilise as the rupee stabilises and the current account funding is addressed in the short run.

The key risks to our assumptions are greater-than-anticipated tapering in the US, a ratings downgrade of India, inflation shooting up with unchecked imports growth and the political landscape further crippling the situation.

As regards crude oil, how do you see the prices evolving?

I do not have a practical view on crude prices as we do not offer any oil commodity-linked products. But in the current scenario, my derived view is that we do not foresee crude oil moving up significantly mainly because of shale gas in the US. Also, if the slowdown persists in China, it will result in a slowdown in the demand for oil from that country too. The chances of oil prices rising to astronomical levels are much lower.

What is the right strategy to invest in debt funds, especially when the interest rates are rising?

Investors should be aware of their risk appetite. Assuming that they have the requisite risk appetite for a long duration fund, investors can look at a 12-18 month investment horizon with staggered investments. Those with lower risk appetites can position themselves in accrual products and passive closed-ended funds.

Do you think that this is a right opportunity to invest in the debt market?

Two elements of the markets which are always active are greed and fear. This is the time when investors have a sense of fear because of the current macroeconomic situation. But it also gives an opportunity to investors to lock in their monies at higher yields in passive products and in a systematic way in duration products for future capital appreciation.

What is your advice for investors in the Indian markets at this juncture?

We advise investing in the fixed income markets in a disciplined way as per the investors’ requisite risk tolerance levels and investment horizon. For example, a person who needs money in the next one month should not invest in long duration funds and should stick to a liquid fund for investments. Investors should get in touch with their investment advisor for assessing their risk appetite and the commensurate fund type suitable to the risk appetite and investment horizon.