In conversation with Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund

The current rising yields present an opportunity for retail investors, expresses Puneet Pal, Head - Fixed Income, PGIM India Mutual Fund

What’s your outlook on the Indian debt markets and yield curve post RBI’s surprise rate hike in its policy rates?

We believe that the Indian yield curve will bear flatten post RBI’s surprise rate hike and we also expect yields to rise further over the course of the next two quarters. The rise in yields will also present an opportunity for long-term investors to invest in Debt Funds as long yields are likely to top out within this financial year.

How are you positioning your debt fund portfolios, particularly core debt categories like dynamic bond fund, corporate bond, and banking and PSU funds in the current high inflation scenario? 

We have been expecting yields to rise and have been running low duration across our portfolios. We will continue to run lower duration over the course of the next three months. We are also underweight on corporate bonds as the spread over G-Sec is very low and we expect spreads to rise during the course of this year as surplus liquidity reduces in the banking system.

How will the forthcoming rate hikes by the Federal Reserve affect Indian debt markets? Will the high volatility persist over the next few months? Which categories of funds are expected to do well? 

The markets have discounted rate hikes by the Federal Reserve but the bigger impact can come from the balance-sheet reduction of the US Federal Reserve. As the US Federal Reserve starts to reduce its balance-sheet, the dollar liquidity will reduce and it can impact emerging markets, including India. This can result in higher volatility across asset classes. We expect actively managed long duration funds to do well and suggest that investors take the opportunity presented by the rising yield environment to increase their exposure to debt funds.

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

The current rising yields present an opportunity for retail investors to start increasing their allocation to fixed income. Retail investors can look to invest across different debt categories depending upon their risk appetite and investment horizon. Given our current view of yield curve flattening, we would recommend that retail investors look to invest in actively managed dynamic bond funds with a three-year-plus investment horizon.

Is it a conducive environment for a relatively aggressive investor who would like to pursue a risky, high-yielding strategy?  

An investor should invest according to his risk appetite and investment horizon. For an investor with a higher risk appetite and longer horizon, we would recommend actively managed dynamic bond funds as we believe that these funds will be able capture the current volatility better and should prove a good investment for an investment horizon of more than three years.