We believe that many adverse credit events in mutual fund industry over the last 2 – 3 years have forced a structural shift of mutual fund investments towards high quality AAA & only a select AA papers as the risk appetite of many mutual fund investors has reduced significantly. Investors no longer take comfort only from high YTMs of the scheme but rather give a due first importance to the Safety as well as the liquidity of the portfolio.

In the absence of high ytm differentials, asset managers must find other avenues of alpha creation and we believe the ability of each Fund house to actively trade upon the relative spread movement of issuers / securities / sectors will be the key differentiating factor. As of now, not many tools are available in the industry to track the daily valuation of more than 5,000 securities and Fund houses will have to develop their own in-house proprietary tools to identify alpha opportunities based on the relative risk-reward evaluation of securities.

Q . How would you assess the performance of your flagship funds over the past financial year? How would you interpret your performance?

Answer : Last FY21 has been full of volatility led by the unprecedented event of Covid-19. It was certainly the first time for many including the Central Govts, Central banks, Asset managers, wealth advisors and investors to face such a high intensity disruption with no well-defined reaction function. Domestically, one of the longest national level complete lockdown in 1QFY21 raised concerns on financial stability of system which saw credit spreads getting elevated by 150-200 bps in a short span of time. While concerted efforts by RBI eased the situation to a great extent, there were bouts of rate volatility during the period. 4QFY21 again proved to be a challenging period for rates as RBI restored the normal liquidity framework and Central Govt announced a high growth oriented & a fiscal expansionary budget.

Led by the un-precedented disruption, FY21 can be largely defined as a year of investor’s preference of Safety, Liquidity, and the Returns in that order. We believe we have been able to manage the FY21 volatility reasonably well. Safety & Liquidity of our portfolio can be gauged from the fact that we have been able to avoid any credit rating downgrade or even a negative rating outlook change across all our funds over last highly turbulent 2 years and have maintained all portfolios largely comprising of highly liquid AAA securities. During the FY21, we also regularly reached out to our existing as well as the potential investors to convey the critical market development & our thought process amidst the fast-changing environment. Much higher growth in our debt AUM in FY21 as compared to the industry average is a reflection of higher investor’s confidence in us during the period.

Q . What is your present investment /portfolio construction strategy for your flagship funds?

Answer : We continue to give the highest importance to Safety & Liquidity across all our Funds. All the portfolios are constructed through a robust top-down macro assessment for interest rate view supplemented by our in-house comprehensive bottom-up credit assessment. Our endeavor is to ensure no negative credit event in any of the scheme while actively managing the duration of our funds within the policy guardrails.

Our Funds in respective scheme categories are spread across the spectrum of yield curve and provides opportunity to the investor to participate across the curve depending upon the risk appetite and investment horizon. Our short end Funds like Overnight, Liquid and Ultra Short are apt for short term cash management.

Our Money Market Fund in 1 year segment which has been specifically positioned to capture the steepness of yield curve, while keeping interest rate volatility under check. It is apt for the investors looking for stability of returns over short to medium term and then be able to re-assess the investment opportunity later amidst rate hardening possibility.

Our Treasury Advantage Fund, Corporate Bond Fund and Short Term Fund are largely positioned over 1 to 4 year space which is well placed from risk-reward perspective.

Our Banking & PSU Fund is a in 10-year segment which gives the benefit of high accrual, while maintaining the flexibility to cut down the duration of fund during rate hike cycle.

Q . How do you see the bond /g-sec yields playing out in this financial year? How would the interest rate move? 6. What would be your advice to investors looking to invest into debt funds for medium to long term investment horizon?

Answer : RBI in its April 2021 monetary policy maintained the status-quo on policy rates and again re-iterated its dovish accommodative monetary policy stance as long as necessary, to sustain growth on a durable basis and continue to mitigate the impact of COVID-19 on the economy, while ensuring that inflation remains within the target going forward. RBI has also assured to maintain surplus systemic liquidity which is critical to maintain conducive borrowing environment. Additionally, RBI has announced the First of its kind Rs. 1 lakh crores of G-Sec Acquisition Program (G-SAP 1.0) in 1QFY22 which is expected to address the volatility in long end of the curve.

On inflation front, RBI sounded more balanced with risks on either side and for good part of FY22, MPC estimates inflation to remain above 5%. Inflationary risks can emanate from supply side disruption and rise in international crude oil prices and poses risks to policy stance. We believe, RBI is cognizant of the risk factors on inflation and will embark upon a gradual exit from loose monetary policy depending upon the sustainability of the growth recovery.

Overall, RBI’s continued accommodative policy & liquidity stance, which now coupled with the G-SAP 1.0 program is expected to reduce the volatility across the curve. The focus of the policy is clearly on the yield management and to ensure the orderly evolution of the yield curve by addressing the market concerns. In our view, the fears of pre-mature withdrawal of RBI’s supportive measures either through upward rate revision or liquidity management have been addressed to an extent atleast over the first half of FY22. Any significant worsening of Covid-19 situation will also warrant the continuation of RBI’s policy support for longer.

The policy stance to maintain ample liquidity augers well for short end of the yield curve, while the long end also gets supported by the active yield management by RBI through the G-SAP (Government security Acquisition Program) 1.0. We feel that 1-4 years segment of the yield curve continues to provide attractive opportunity from risk-reward perspective and should be a part of core fixed income allocation. Additionally, favorable demand-supply dynamics also augers well for this segment. Now, with clarity emerging on OMOs and scheduled calendar, we expect volatility at longer end to reduce. We feel that current yields at longer-end provide good entry point to the investors looking for long term allocation given the steepness of yield curve. Some allocation at the longer end also finds merit on the back of conviction that RBI will manage the yield curve and may support the long-term yields.

Q . What would you say to investors exploring traditional debt products compared to debt funds for short to medium term, driven by lower returns?

Answer : I would like to reiterate that Fixed Income is a very important asset class and should be seen as a part of our core asset allocation just the way we look at the other asset classes like gold, real estate, equity etc. Many of us don’t realize but most of our investments are already into Fixed income products like bank FDs or in saving accounts. Debt Mutual Funds provide different products ranging from 1 day to even 20 years and can be used by the investors as per their portfolio allocation requirement. Investing in mutual funds has been becoming easier & more convenient with the rapid digital evolution.

RBI’s loose monetary policy & rate cuts amidst the Covid-19 led disruption can be of help for High credit quality oriented short to medium term corporate bond funds across different scheme categories to deliver an attractive investment opportunity to all investor segments for long term.

Disclaimer –

The views are expressed by Vikas Garg at Invesco Asset Management (India) Private Limited. The write up is for informational purposes only and should not be construed as an investment advice or recommendation to any party or solicitation to buy, sell or hold any security or to adopt any investment strategy. It should not be construed as investment advice to any party.. It contains statements that are "forward looking statements," which are based on certain assumptions of future events. Forward-looking statements are based on information available on the date hereof. Actual events may differ from those assumed. The views and opinions are rendered as of the date and may change without notice. The statements contained herein may include statements of future expectations and other forward looking statements that are based on the prevailing market conditions / various other factors and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. The data used in this document is obtained by Invesco Asset Management (India) Private Limited (IAMI) from the sources that it considers reliable. While utmost care has been exercised while preparing this document, IAMI does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. The readers should exercise due caution and/or seek appropriate professional advice before making any decision or entering into any financial obligation based on information, statement or opinion which is expressed herein.