Despite being around since 2008, Mirae Asset India mutual fund has largely been known for stellar returns from its equity funds. However, in 2017, it decided to re-enter the debt funds space slowly and steadily. Still, just 10 percent of its overall assets lie in debt funds – around Rs 6,500 crore. Mahendra Kumar Jajoo, CIO- Fixed Income, Mirae Asset Investment Managers (India), believes that interest rates may be range-bound in the first half of financial year (FY) 21-22. With nearly three decades of experience, Jajoo says that investors who stay put through the interest rate cycle, will make better returns. “We are in a transitory phase,” he says. In an interview with Vatsala Kamat, he highlights the challenges ahead for fund managers, as interest rates respond to high growth and perhaps inflation.
Given the pause in rate cuts, what do you think will be the rate trajectory?
Three distinct trends are at play right now. An ultra-loose monetary policy for the last one year to stabilize financial markets following the COVID-19 outbreak, fiscal support to growth after the lockdown and efforts to contain the spread of the pandemic.
Meanwhile, global interest rates are supportive and headline inflation has come down to 4.1 percent in February. So, there is room for the Reserve Bank of India to keep rates low, which it has guided for, too.
That said, if the economy picks up, imports will pick up. By then, monsoon outlook will also give a clue on food prices.
I believe that while the first half of this year will see interest rates being range-bound, the second half will be a function of a combination of these factors. Also, if global bond yields rise, they will also put pressure on the domestic bond yields.
What are the challenges in such a scenario? Are you equipped to manage your debt funds if interest rates begin to rise?
We follow a flexible interest rate strategy. When interest rates are likely to go up, we lower the duration of assets in the portfolio and vice-versa. This provides reasonable downside protection to the investor when rates rise and also enables participation in the market rally when rates decline.
Our endeavour is to get the market movements right and align the duration of our portfolio accordingly. Investors, however, must stay focused on their investment horizon and their risk appetite, instead of bothering about the direction of interest rates, which are cyclical.
Where are we in the cycle now? What must an investor do to maximise his returns from debt funds?
We are at the bottom of the current interest rate cycle. At best, there could be one more rate cut. But we won’t see a sudden spike in rates either, since the macroeconomic fundamentals are largely stable.
This is a transitory phase and COVID-led disruption has to normalise.
The challenge comes when we enter a high-growth phase. Demand will surge, corporate credit requirement will rise and inflation could return. So, possibly, interest rates would then pick up, though it is hard to predict the pace.
That said, given that India’s macro fundamentals are improving, the longer-term interest rate trajectory is trending lower. So, the longer an investor stays invested in debt funds, the better would be her return.
Timing your investment is hard as the macroeconomic shifts are too sharp for a lay investor to take tactical calls. Staying invested through a cycle helps absorb short-term shocks in the economy.
Given that debt fund returns are largely range bound, how do you get the returns kicker to stay ahead of the market?
We need to be watchful about any new signals, reversal in trends or any inflection points that could impact rates and yields. During such periods of uncertainty, when trends change, what determines a debt scheme’s underperformance or outperformance is the fund manager’s actions. It is sometimes, a game of patience.
Also, whatever we do and the way we manage our funds must be within our overall fund management strategy. It is important to communicate the trends effectively to investors so that they know the objectives of fixed-income instruments. This will prevent shocks from bizarre and uninformed outflows and inflows.
January saw net inflows into credit risk funds. Do you think it signals a revival in the interest on the segment?
I think outflows from credit risk funds have stopped. Inflows are a mere trickle still. The system has got a lot of support from regulators and the government to check any dysfunction in the financial markets. So, the risk of massive credit defaults has receded significantly.
I look at credit risk funds differently. There are bound to be credit-linked problems in an economy. At such times, historically the bond funds with high credit quality and gilt funds do well over a longer term horizon. This is because when there is financial or a credit crisis, the credit-risk funds get affected first. Recovery in the segment is often poor and clumsy. I don’t think that investors get adequately rewarded over a long term, for the risk taken.