With over 16 years of experience in managing fixed-income funds, Sujoy Kumar Das comes with a long track record having worked in fund houses such as BOI AXA Investment Managers Ltd and DSP BlackRock Investment Managers Ltd. At Religare Asset Management Ltd, he heads the debt funds team that manages assets (in the fixed income space) worth a little over Rs. 11,000 crore. Among other things, Das is excited about the recently concluded new fund offer by the fund house, called Religare Bank Debt Fund, at the moment. He shares some facets about the fund, apart from explaining how to make money in debt funds.
The new fund offer period of your recently launched scheme, Religare Bank Debt Fund, got over. How much money did you collect?
We collected Rs.115 crore.
Do you have enough instruments in the markets?
Yes we have. The scheme’s portfolio has already been constructed. It largely comprises of bank bonds. We have picked up bank bonds of 10 years average maturity and a smaller portion in certificates of deposits and a very small portion in government securities (G-secs).
You have enough market for bank bonds and is it a liquid market?
Absolutely. In the secondary market, the liquidity of bank bonds is obviously lower than that of G-secs, but it is sufficient and liquid enough to create a liquid portfolio.
Since interest rates move in cycles, many think long-term bond and G-sec funds are seasonal and to be used opportunistically. Do you agree?
We can go on discussing that endlessly. But the point here is interest rates always move in cycles, either up or down. In between, when the 10-year benchmark G-sec rates move, say, down from 9% to 6%, up to 8.5%, down to 5% and so on, look out for the average rate in the cycle. If you draw a straight line in the centre of all highs and lows. Then, check the prevalent 10-year rate.
If the prevalent rate is above the average rate, then the probability that it is going to move towards the average is far higher than the probability that it will move away. If you are investing where interest rates are below the average and still expect capital appreciation, it won’t happen.
At present, the 10-year yield is at about 7.90%. People are still debating whether or not this is a good time to invest in the debt market. We feel that this is the ideal time to invest because if you look at a block of seven years on how G-sec yields have moved, the average has been around 7.72%. Today, the yield is, as I said, 7.9%. So we’re still above the average mark.
Some investors say that they “made a loss in 2008-09” when they invested in bond funds in the later part of 2008. Here’s what happened: In April 2008, the 10-year G-sec yield was quite high, somewhere close to 8.5-9%. From that level, it collapsed to about 5%. Then, on 5 January 2009, then-finance minister Pranab Mukherjee announced an additional borrowing programme that spooked the debt markets. Yields shot up.
Now if investors had come in when the G-sec yields were at, say, 6-6.5% and then expect the yields to go down to 3% (when interest rates fall, bond prices—and therefore, the net asset values of debt funds—go up), that wasn’t going to happen.
Fixed-income products cannot deliver more than what the nation’s interest rate structure is. So investors should look at fixed-income products from an income and liquidity point of view.
But then, if debt funds don’t assure returns like fixed deposits (FDs), shouldn’t investors expect capital gains?
That is why debt fund investors need to be comfortable with volatility. Since the investor doesn’t know how to navigate volatility, they come to debt funds where fund managers enter and exit markets, opportunistically. So in times such as when the finance minister in 2009 announced an additional borrowing programme and the yields started to go up, fund managers are expected to reduce the “duration” of their portfolios to avoid capital losses. Then, when interest rates peak and look set to decline, the fund manager can go back and increase his portfolio’s duration.
That being the case, don’t debt funds become a bit complicated for retail investors, then?
Yes of course, they do. But remember, bank FDs are not for investors, they are for savers. So we are talking of a class who has now understood that they need to be open to the idea of earning something more than an FD. Although an FD is a brilliant savings product, it doesn’t give you liquidity. A debt MF gets you liquidity but you are also open to market risks. Over a long term, debt funds have outperformed FDs.
Having said that, investors need to be clear about their investment horizon and select a fund with an appropriate duration. If you do that, half your job is done.
Where do you think interest rates are headed in 2013?
We feel that Reserve Bank of India will drop interest rates quickly in the next one or two quarters. But it is going to be very short-lived because eventually in India, demand from rural population—which has seen a huge amount of wealth creation in the last few years—is going to be very strong. Eventually, the current inflationary regime (which is 7%-plus) will be the new normal for India. And hence interest rates will eventually be at those levels with a hardening bias for the next four-five years.