The key learning as a fund manager in such an environment has been one of perseverance in investment strategy focussed on liquidity & safety and faith in the establishment.

Q . We have seen RBI infusing a lot of liquidity into the system and pursue its easy monetary policy in 2020. How do you think things will span out this year?

Answer : The uptick in economic growth does point towards the success of monetary easing we have seen over the past few months. We do not expect further easing to be as aggressive or even necessary. In our view, the rate cycle seems to have bottomed out but we do not see the RBI changing its accommodative stance anytime soon. The liquidity in the system is likely to remain in surplus mode as it is expected that RBI will support the ongoing economic growth in becoming deeper and stronger.

Q . What would be the key drivers for debt fund markets this year?

Answer : There has been an uptick in economic growth in the past quarter which indicates the success of monetary easing and fiscal stimulus seen in past few months. Inflation is expected to moderate in coming months primarily on back of softening of food inflation and favourable base effect. Going forward the market participants would be watchful for an uptick in inflation due to improvement in domestic consumption, rising crude oil and commodity prices. On rate front, the rate cycle seems to have bottomed out and we may see an extended pause by RBI. The possibility of RBI changing its accommodative stance anytime soon is very low. Further, any announcement of OMO and/or actions to increase the operating rates would have an impact on yields. The market participants would also keenly track the government borrowing and fiscal deficit estimates in the upcoming budget. On the global front, crude oil price trajectory, movement of the rupee against the greenback, stance adopted by major global central banks on their respective monetary policies and transaction trends by foreign portfolio investors are few factors which might impact the domestic bond yields.

Q . Can you please update as to direction of the corporate bond yields and benchmark G -Sec yields?How do you foresee the yields behave this year ?

Answer : We may continue to see appetite for the 3 to 5 years Corporate Bond segment as Mutual Funds are seeing interest in the short-term funds and the recent retracement due to liquidity measures by RBI may make this segment attractive. On the longer end of the curve, we expect the 10 year G-sec to be range bound between 5.80-6.00% in the near term as RBI is likely to intervene and support the yields through the use of OMOs. Going ahead various domestic and global factors such as the fiscal numbers announced in budget, RBI action on the monetary front, inflation trajectory, crude oil price trajectory, stance adopted by major global central banks etc. would help determine the movement of yields.

Q . Can you explain in layman terms the reason behind lower returns on liquid and similar short term duration funds? Why should investors continue to look at them favourably?

Answer : During the fall out of Covid-19 in March 2020, FPIs had trimmed their debt positions due to their risk-off behaviour and mutual funds had to sell securities to generate liquidity to meet redemptions due to seasonality of fund outflows. This has resulted in uptick in yields and widening of spreads across the shorter end of the yield curve. To support economic growth during the pandemic, RBI has supported the debt markets time and again through announcement of various conventional measures like rate cuts, OMOs and certain unconventional measures like TLTRO, increase in HTM Limits, etc. Through these measures RBI has ensured that there is ample liquidity in the system and had brought the operating rate at the shorter end of the yield curve down to 2.5 to 2.6%. With muted credit growth, the yields at the shorter end of the curve (which are pegged to the operating rate), the returns from liquid and short term duration funds were low. We believe that few months down the line these short term rates might move up as RBI is making conscious attempt to increase the overnight rate above the reverse repo rate. At UTI, the liquid and short term duration funds maintain a high a quality portfolio and the duration of these funds is actively managed to minimalize impact of duration risk in case yields go up.

Q . What would be your advice to investors looking for safe funds to invest with? What should be their risk and returns expectations from your flagship funds at spread across different durations?

Answer : Investors with low risk appetite could look accrual oriented products such as UTI Money-market Fund & UTI Ultra ST Fund for parking short term surpluses and for a investment horizon of 3 years at UTI TAF, Short Term Income Fund and Corporate Bond Funds all of which have highly rated issuers in its portfolios. Investors need to align the return expectations with the prevailing level of interest rates as these funds have yield to maturity of their portfolios to vary between 4.75% and 5.50%. As the interest cycle seems to have bottomed out, the longer duration funds may find it hard to outperform currently.

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