As interest rates rise, debt fund investors should be happy with lower returns: DSP Mutual Fund

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© Venkatasubramanian K As interest rates rise, debt fund investors should be happy with lower returns: DSP Mutual Fund

Investors of debt mutual funds have made reasonably good returns over the last few years, amidst falling interest rates. In an interaction with Jash Kriplani, the Head-Fixed Income of DSP Mutual Fund (DSP MF), Saurabh Bhatia, says investors should now focus on risks, and not be surprised if returns are lower than what they earned in the past. He suggests investment strategies that investors can follow while choosing bond schemes. Excerpts.

How should investors handle their debt funds, with expectations of rising interest rates?

It is important to debunk the belief that rising interest rates mean risks for investors. It is just a change in the phase of the interest rate cycle. Just as when interest rates fall, your fund would reflect higher duration risk, you can expect the fund to sport lower duration risk through a rising rate cycle. As interest rates rise, investors should be content with lower returns compared to what they have earned over the last two years or so.

What should be some of the red flags debt fund investors should watch out for now?

First, identify a debt fund after seeing the track record of risk boundaries that it is managed within, and not just its return performance. If the former is in place, it will take care of the latter.

One needs to review investments more frequently, if the duration or credit risk of the fund changes frequently. If the fund has been selected after considering its risk track-record, it will eliminate the need to frequently review the investments.

What should investors do to build a portfolio that can see them through the ups and downs of debt markets?

Every asset class has its ups and downs. Debt mutual fund investors should tick three boxes to meet their return expectations. These are: liquidity, predictability (of returns) and (lower) volatility. Liquidity doesn’t mean need for money, but ability of the investments to reset when interest rates move from one phase to another.

To tick these boxes, we recommend investing in short tenor roll-down funds and open-ended schemes, depending on your time horizon. Roll-down funds help in ticking the box for liquidity, predictability and lower volatility, opening the room for taking more risks in the open-ended strategy.

Once the investor has zeroed in on a fund after making various checks as mentioned earlier, as well as noting if the fund meets their tolerance for volatility, it is advised not to do lot of things with the investment. Changing rate cycles will lead to changes in the fund manager’s strategy. Volatility is inevitable and running away from it can deny long-term benefits of staying put in a debt mutual fund.

We have seen a lot of passive debt funds being launched recently. What are your thoughts on such funds and will DSP MF roll out these too?

DSP Mutual Fund has been running passive strategies over the last few years, through a couple of funds. If there is more demand, we will cater to it. However, passive investing is not a new strategy. We already have that in the form of roll-down funds, which have been there in the industry for some time. A few of these launches are new variants of these roll-down strategies, which are managed as passive funds. So, we don’t see this as an emerging trend, but as wider acceptance of these roll-down strategies.