"Understand personal risk profile and goals before investing in fixed-income funds"

Interview with Pratik Shroff, Fund Manager – Fixed Income, LIC Mutual Fund Asset Management Limited.

Given the recent shifts in global interest rates and inflation trends, how are you positioning LIC Mutual Fund's fixed-income portfolios to overcome these changes?
The year gone by was dominated by Geo-Political risks, and high inflation across economies leading to heavy volatility across asset classes. However, Indian bonds and the Indian Rupee remained extremely well-behaved and emerged as one of the best performers among their peers. The forward inflation guidance from RBI shows signs of moderation, the growth forecasts have also been lowered post a lower GDP of 5.4 per cent in Q2.

In the given circumstances we expect RBI to come up with some durable measures to address the current liquidity deficit situation and the domestic rate cut cycle to begin in the near term. Considering these we have continued to maintain high duration across the schemes as permitted by respective scheme objectives.

With the evolving credit environment, what measures are you implementing to manage credit risk within your fixed-income funds?
We believe that in the current economic backdrop, the biggest beneficiary would be the Sovereign and the AAA corporate bond curve. We do not expect the spreads between the AAA vis a vis the AA to narrow down immediately.

Being an Asset Manager with a credible track record, we implement the most stringent of risk management practices. Each entity is assessed on several parameters with high weightage given to corporate governance, promoters track record and financial risk profile, ensuring a balance between risk and reward for our investors.

How do you assess the current state of the Indian fixed-income market, and what are your predictions for the next few years?
Over the years the Indian fixed-income market has evolved under the guidance of regulators and the inclusion of Indian sovereign bonds in global indices has been a testament to that fact. The investor base and the issuer base over the years have grown and the corporate bond markets have nearly quadrupled over the past decade which shows growing investor confidence. The lower-rated segments still face challenges and need better investor awareness and education.

The Union Budget 2025 is anticipated to focus on fiscal stability, tax reforms, and investment growth. What specific measures are you expecting that could impact the fixed-income market?
In the Union budget 2025, we expect the government to ensure fiscal consolidation with the fiscal deficit for FY26 expected at around 4.5 per cent. This can be a positive for domestic bonds not only in the short term but also gives an opportunity for a rating upgrade which increases the possibility of inclusion of other global bond indices. We expect some tax relief for fixed-income investors enticing better diversification for investors.   

What would be your advice for investors looking to position their fixed-income portfolios in light of the budget announcements?
We would advise investors to look at a broader picture as a chain of events are lined up and take a medium to long-term view based on the risk appetite. We expect the 10-year G-Sec yield to head towards the 6.35-6.45 per cent range in the medium term as the domestic rate easing cycle begins.

With the increasing focus on digitalisation and green finance, how do you see these trends affecting the fixed-income landscape in India?
Green financing has become a necessity in light of environmental risks across the globe. Globally these bonds have a wide acceptability among the investors. However, domestically this market is at a very nascent stage and with incentives from the government and regulator we expect this market to grow at a steady pace.

Finally, what advice would you give to someone new to investing in fixed-income funds?
It is essential to understand personal risk profile and goals. By default, everyone is invested in fixed-income through bank accounts and savings schemes, but investment in fixed-income capital markets requires more expertise. Fund Houses offer a bouquet of products ranging from different credit profiles to durations. One should focus on the Risk-o-meter and Potential Risk Class (PRC) matrix on individual schemes to better understand the risks. This data is mandatory and easily available in the factsheets and scheme information documents of respective schemes.

Disclaimer: The opinions expressed above are personal and may not reflect the views of Dalal Street Investment Journal.