Dynamic bond funds spawn highest absolute returns: Amit Tripathi

Reliance Mutual Fund recently crossed a Rs 1 lakh crore corpus in its debt assets under management. Amit Tripathi, head of debt investments, tells Joydeep Ghosh the recent fall in inflation is structural in nature, and hence, the Reserve Bank of India (RBI) is likely to cut rates by 50-75 bps in the next 12 to 15 months. Edited excerpts:

In a year when equity funds have done well with Rs 6,000 crore to Rs 7,000 crore monthly (sector figures) inflows, what flows have been witnessed by debt funds?

Since January 2014 (the last 18 months), debt funds have seen a monthly net inflow of Rs 6,000 crore. This number would have been greater but for net outflows from fixed maturity plans (FMPs). Obviously, the gross flows are much higher as investors also come into liquid products for much shorter tenures also.

What schemes, in terms of tenure, have seen substantial inflow?

Apart from liquid funds, which account for nearly 30 per cent of the net flows, open-ended debt funds, specifically in the one to three-year duration space such as short-term bond funds and credit-oriented funds, have seen the largest inflows. This is followed by long-duration products, favoured by investors in a declining interest rate environment.

While equity investors, typically, enter the market during rising phases, how do retail investors behave in debt mutual funds? Do they enter liquid funds more or income or FMPs?

Retail investors typically come into debt funds with a one to three-year time horizon, and even longer. So, they are not necessarily looking to time the market, but rather looking for reasonable risk-adjusted returns over the holding period. In that context, different types of open-ended debt funds like short-term bond funds, credit-oriented funds and dynamic bond funds are preferred. FMPs are a good entry-level product for a retail investor, but a lot of them have since started graduating toward the open-ended funds.

How have investors reacted to the change in debt fund guidelines in the July 2014 Budget? Were there more conversions to longer-tenure FMPs or did they choose to move out and get into shorter term (less than one year) schemes?

FMPs are favoured in an environment of high interest rates as the potential holding period returns are higher. The change in taxation norms is applicable across debt funds and not just to FMPs. In our view, the value proposition in all these funds goes much beyond only tax efficiency. Investors have realised over the last decade that various mutual fund debt products provide better risk-adjusted returns over many other traditional debt investment avenues and hence, prefer to invest here. In an environment, where core liquidity conditions have improved meaningfully and the interest rates are also gradually declining, investors typically would favour open-ended debt schemes over FMPs.

Where do you see inflation heading? Some analysts feel the fall is only temporary while others say there could be a spike in the future. Where do you stand?

The fall in inflation is structural in our view, driven by lower wage pressures, excellent supply side responses from the government and lower commodity prices. Fiscal prudence is the first and the most important driver for a structural decline in inflation, which has been religiously followed for three years.

Consequently, where do you see interest rates heading? While we might have entered a lower interest rate regime, analysts are again divided on when the next cut will come. Some feel  RBI will cut rate once more in FY16. Others say it could be much longer. What is your opinion?

RBI has laid down conditions for further rate cuts in a very transparent manner. Since we view this fall in inflation as structural, we continue to expect another 50-75 basis points of rate cuts over the next 12 to 15 months. For us, the direction is more important than the timing.

What schemes (tenure-wise) are you advising retail investors currently?

A structural improvement in inflationary environment and in core liquidity conditions will encourage a bullish steepening of the yield curve. Not only do we expect a fall in yields from here, but also that this fall will be more pronounced at the shorter end of the yield curve. While short-term bond funds, including corporate bond funds would best capture the improvement in liquidity conditions, the dynamic bond fund category will possibly generate the highest absolute returns, given the duration advantage. Investors need to choose amongst these based on their risk appetite (read interim volatility) and their holding period horizon.

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