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Last Updated : Sep 09, 2015 10:32 AM IST | Source: CNBC-TV18

See better returns from fixed income in 12-mths: Axis MF

Every investor needs to have asset allocation towards fixed income, says R Sivakumar, Head Fixed Income at Axis MF.


In such volatile times is it time to move away from equities into fixed income? R Sivakumar, Head Fixed Income at Axis MF concurs saying with global growth outlook weak, fixed income category would naturally give better returns for investors looking at a one-year horizon. “Purely from bond market point of view next year should be strong,” he adds.

Although there are good reasons to invest into fixed income now, the house does not look at investing in fixed income only when equity markets are volatile. Every investor needs to have asset allocation towards fixed income, says Sivakumar in an interview to CNBC-TV18.

Even as flows into fixed income continue to come in, interestingly, asset allocation by retail participation has happened through hybrid product that combines debt and equity. And this according to him is the right approach for investors.

Below is the transcript of R Sivakumar's interview with Reema Tendulkar and Latha Venkatesh on CNBC-TV18.

Reema: Give us three reasons why fixed income make sense for even a retail investor at this point of time and secondly have you already seen increased inflows into the fixed income market?

A: There are very good reasons to invest in fixed income but I don’t advise or I don’t look at the fixed income purely as a timing to look at it the equity markets are volatile. Every investor needs to have an asset allocation towards fixed income clearly what we have seen in terms of investor flows of course flows have come into fixed income fund but what is interesting is the increased share of flows that have come into asset allocation or hybrid products, which combined debt and equity. So a lot of retail participation has come into fixed income through this hybrid route, which is trying to reduce equity market volatility and its impact on the investments. So I think that is where we are seeing a larger share of flows and perhaps the right way for investors to take an asset allocation in their portfolio.

Latha: At the moment, are you getting a sense that returns will be better in fixed income than in equity with a 12 months view, has the global growth picture broken down so much.

A: Certainly the global growth outlook is weaker and weaker growth is almost certainly good for bond markets given clearly the fall in commodity prices etc. So yes, with the consumer price index (CPI) inflation now at under 4 percent and Dr Rajan having clearly indicated his preference for cutting rates, we do expect that bonds will do very well over the next year and we have been running long duration to take advantage of that. So purely from a bond market point of view, the next year should be very strong. We know that equity markets are volatile and unpredictable when you look at one year horizons. So yes, investors who are looking at a one-year horizon, purely from a predictability of returns perspective, I would say fixed income investment makes a lot of sense.

Latha: We suddenly had this accident Amtek or that group, is there within fixed income a category where you can be a little safe, would gilt funds be the way to go and not necessarily fixed income?

A: Within fixed income, investors have invested a lot of money in credit funds. My belief is investors need to take an asset allocation approach even there. Let us look at it, if you have a highly rated bank and a poorly rated bank or a non-banking financial companies (NBFCs) or a co-operative bank, would you move all of your money there just because you are getting one percent higher yield. That is the same attitude you need to have in your mutual fund investments as well.

So the issues around a specific downgrade is not a systemic issue for the industry but investors need to look past that and look at portfolios and have a larger allocation towards good quality portfolios whether that will be government securities or AAA rated securities where safety is paramount and look at credit or higher yield portfolios as an add on rather than a primary investment into fixed income market.

Latha: What is your hunch? Is the company I referred to Amtek Auto a oneoff or is it that since growth has broken down we should be prepared for these kinds of events?

A: There are two driving forces, one is the macroeconomic slowdown over the last few years and two, the sharp fall in commodity prices means that there has been a substantial increase in credit risk over the last couple of years and we have seen bank non-performing assets (NPAs) for example rise to close to 10-year high. So obviously there is stress in the system. I do not want to take that away.

Having said that, mutual funds are not investing in a speculative grade paper. By regulation, we have to invest only in investment grade debt. Therefore the number of defaults in the mutual fund portfolios are likely to be extremely rare and limited. Having said that, there are ways to handle default risks through diversification, which if you adopt a reasonable policy, you can minimise the chances of downgrades in defaults in your portfolio or at least the impact on your portfolio. Having concentrated bets in lower rated companies is something we do not want to do.

Reema: The problem is you may not invest in a speculative grade company but its environment which has made many companies which were earlier rated well turn into perhaps bad assets, something that we saw in the case of Amtek Auto when its rating was downgraded. The fear in the market is that many of these debt funds also have exposures to corporate papers or NCDs of other stressed sectors like iron and steel, power, mining, so how should we assess the risk of fixed income right now because it seems to be that they too are beset by the same problems as equity?

A: I think -- I keep coming back to the point that credit quality has certainly deteriorated. But the fear from the mutual fund perspective is that this is overlaid with a very large size. The credit fund industry has grown to nearly Rs 70,000 crore in assets and it is more a concern of the liquidity of the portfolio rather than credit quality, which is paramount right now. Should there be redemptions in these industry, it is going to be very difficult to liquidate these assets because they are very illiquid and that has a larger cause of concern than your credit, I think credit is a manageable problem.

Latha: Let me come to the asset allocation issue, is there a thumb rule of asset allocation in terms of debt funds? Something linked to your age -- there are rules that equity funds should be inverse of your age so is debt funds in proportion with your age?

A: I think that is a fair point that you need to have debt, as a proportion of your investments increase, as you get closer to your retirement age etc., but even early in life, you need to have a protection against sharp falls in the market. We have seen in the past, equity markets can be very volatile and therefore to protect your value of investments even when you are young, you need to have some allocation towards fixed income.

So that is a starting point, there is no clear rule of thumb, it depends on every investor, some investors are naturally more risk takers than others but for each investor, I think you need to have your own plan, certainly there are advisors in the market who can help with making a plan and invest accordingly.

The second thing is not all investor goals are retirement linked or age linked. Some of your goals are more linked towards -- for example, planning a holiday or buying a car in the next couple of years, those goals should be linked with higher fixed income allocation simply because those goals are near-term in nature and you do not want to take very large risk with your investments, which are tied to those goals.

Reema: If I invest in a fixed income plan now and if the RBI goes ahead and cuts rates thereafter, will I benefit immediately or do you think perhaps a rate cut has already been priced in and secondly, how many more rate cuts do you expect in the next one year?

A: I will start with the second question on rate cuts - even working with a 5 percent inflation on average over the next year or two, and Dr Rajan is near a point of having at least 1.5 percent real rate, realistically we should look at the repo rate going to about 6.5 percent, which implies 75 bps of rate cut from here. Today, the market is not pricing in rate cuts even though there has been some softening of yields from the stressed levels that we saw a month or two back, it still means that the market is not pricing in any rate cut and you will see a near 1:1 translation between rate cuts and bond market yields. So long duration funds, will completely benefit from rate cuts as soon as they start to happen.

I will add a very small point of here that earlier in this year, in January when the first rate cut started the bond markets had fully priced in that rate cut and since then with three rate cuts, the markets haven’t gone anywhere. So it is very important also for investors not to wait for a rate cut before investing. Get in when the markets are not expecting a rate cut.

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First Published on Sep 8, 2015 02:20 pm
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