In an interview with MintGenie, G Pradeepkumar, CEO, Union AMC said that from an investor's point of view, he believes that the time has come to consider investing in debt funds, especially gilt funds which carry very low credit risk but relatively high-interest rate risk. He added that the time is ripe to add long-duration funds to your portfolio as the current steepness of the curve in around 4-5-year duration securities offers a good risk-reward proposition.
Edited Excerpts
The overall mutual fund outflow for the month of June has surged nearly 10 times from around ₹7,500 crore in May to nearly ₹70,000 crore in June. What are the key reasons behind the same?
Outflows at the end of a quarter from short-term debt funds are not unusual. Even the end of the previous quarter had witnessed similar outflows. One reason this time was probably the volatility in yields which might have made some investors nervous. Moreover, it is the Overnight, Liquid and Ultra Short Duration fund categories that have witnessed outflows of around ₹46,000 crore some of which in our opinion could have gone towards payment of quarterly advance tax dues. In all of this, the net inflows into equity funds have remained robust at ₹15,480 crore.
The Debt-oriented schemes have also witnessed massive outflows worth ₹92,000 crore despite a rising interest rate environment. Why do you think that is?
A good part of the outflows could be attributed to the reasons mentioned above. Between March and June 2022, the interest rates have moved up too swiftly for some investors to digest the losses on their debt portfolios. This might have prompted investors to move away from debt funds in the short term.
How should debt investors react to this latest data? Is there a need to restructure portfolios?
We see no reason for investors to react to each and every data point. There is definitely a place for fixed-income products in the overall investment portfolio of investors. This allocation varies depending on risk appetite and returns outcome expected by an investor. A judicious mix of fixed income portfolios with some portion kept aside to meet contingency and some portion to take benefit of higher yields with varying risk appetite can keep them in good stead. However, an investor who has been sitting on cash for some time now or the one having low duration funds in their portfolio can look afresh at adding long-duration funds, given the fact that the yields have moved up considerably from the pandemic level.
Do you see any recovery in the debt-oriented schemes in the future? If yes by when and what would lead to such a recovery?
Rising interest rates is a result of various global central banks responding to high inflation by winding up their ultra-loose monetary policies that were deployed during the pandemic. While inflation has continued to remain sticky, some of the economies across the globe are slowing down. Going by the estimate of RBI, inflation should come down during the second half of this year. As and when inflation steadies at levels that are in the comfort zone of RBI we could see stability in the interest rates regime which could lead to a recovery in bond prices. From an investor's point of view, we believe that the time has come to consider investing in debt funds, especially gilt funds which carry very low credit risk but relatively high-interest rate risk.
How do you think a long-term investor should balance his/her portfolio in the current environment? Focus more on equity or stick with debt despite outflows?
From the point of equities, we feel at current levels the market is fairly valued. Thus, investing in equity funds with an investment horizon of five years and above could lead to reasonable returns. The selection of funds can be best decided based on the risk appetite and investment goals of each investor. It is important for investors to stick to their investment plans. Outflows from debt funds should not be a reason to change your asset allocation plan. In any case, it is worthwhile to seek the help of a distributor or advisor.
What are the key trends that will impact debt folios going ahead?
We feel macroeconomic factors such as economic growth, the ongoing geopolitical tension, the trajectory of inflation and in turn the movement of interest rates by central banks will have bearing on the performance of debt funds.
If you can just give one piece of advice to new investors, what would it be?
Take ample time to decide your investment goal and the asset allocation that will help you reach there. But once you have arrived at an asset allocation plan, do not abandon it even if you see volatility. Time is the biggest compounding factor.
Amid debt funds, where should investors focus to get reasonable returns in the next 5 years?
We believe the time is ripe to add long-duration funds to your portfolio. The current steepness of the curve in around 4-5-year duration securities offers a good risk-reward proposition. Gilt funds, for example, offer a good opportunity for someone with an investment horizon of more than three years. While the yields may go up a little further in the short term, over the next three years there is a probability that the interest rates may reverse, leading to a gain in prices. The current yield levels offer a reasonably good entry point. Also, an investor can enjoy the benefit of long-term capital gains tax with indexation if invested for a period of 3 years and above.
If an investor wants to put 100 percent of their portfolio in debt funds, how should he/she structure a portfolio?
We would normally not advise an investor to take 100% exposure to debt funds. Returns expectations and risk appetite of investors vary from individual to individual. In our opinion, an investor can look at the entire spectrum of debt funds and choose the ones that are commensurate to their risk returns expectation. It would be important to take the help of a good distributor or advisor.
Ultra-short term funds or long-duration debt funds, what would be your pick?
These funds serve two different purposes. Money that is meant for up to 1 year could be parked in Ultra Short Duration Fund while the money that is meant for three years or above can be parked in Long Duration Funds.
