Inflation was the biggest newsmaker of 2022, and central banks around the world hiked interest rates. India was no exception. The Reserve Bank of India (RBI) hiked the repo rate by 225 basis points (bps) from May 2022 to 6.25 percent.
Predictably, the yield of the benchmark 10-year security went up -- from 6.45 percent at the beginning of the year to 7.31 percent, as on December 28, 2022.
Debt funds felt the maximum pain as returns fell. But fund houses started launching target maturity funds to capitalise on the rising interest rates. With inflation coming under control and interest rates assumed to be near their peak, experts believe that, in 2023, how you choose your debt funds and debt investments will be crucial.
Moneycontrol caught up with Marzban Irani, Chief Investment Officer, Fixed Income, LIC Mutual Fund, who has been in the Rs 40-lakh-crore Indian Mutual Fund (MF) industry for close to 22 years.
Having worked at Tata MF, Mirae Asset India MF and DSP MF in the past, Irani has seen the highs and lows of the debt markets, including the great debt crisis of 2008 as well as the COVID-induced liquidity crisis. He feels the worst is over for debt funds, and investors must now get serious about debt allocation.
Edited excerpts:
Q: I have Rs 10 lakh to invest today. What do you recommend? I know asset allocation is specific to individuals, but give us some broad guidance.A: The thumb rule is 100 minus your age should be invested in equity. So, if someone is 40 years old, he/she should invest 60 percent in equity and the rest in fixed income.
However, since debt is a very attractive market now, I would suggest someone to put 55-60 percent of money in debt, 5 percent in gold and the rest in equity. This can be altered, depending upon the different short-term and long-term goals of an individual.
Also read | Should you buy gold and silver in 2023?
Q: Interest rates are rising, but experts say they may not go up much more. Should you invest in short-term bonds or is it time to invest in long-term debt?A: We have seen aggressive rate hikes in 2022 on concerns of rising inflation. We now believe that the phase of rising crude oil prices and food inflation is over. We have also seen the rupee stabilising over a period of time. So rate hikes are declining gradually.
We have come from a 50 bps hike to 35 bps hike in the last monetary policy meeting. We might even see the governor skip it in February and then have a last 25 bps hike in April. Basically, the worst is behind us now.
So, while we were advising investors to invest in very short-term schemes when the interest rates were close to 3.5-4 percent, we are now telling them to invest in medium- to long-term debt, depending on their risk appetite.
Q: There are 16 categories of debt funds. Five are meant for short-term goals, two for short to medium duration and the remaining for long-term goals. Financial planners always tell investors to limit their overall portfolio to about 6-8 mutual fund schemes. How do you even decide which categories of debt funds you should opt for and which ones to avoid?A: There should be three main categories one should focus on -- liquid funds for around three months, banking PSU funds for three years and sovereign gilt funds for anything longer than that.
Marzban Irani of LIC Mutual Fund believes that credit funds should not have a space in a retail investor's portfolio
One category that investors should ideally avoid is credit funds, unless you have the required risk appetite. Even there, my personal recommendation would be to go for hybrid funds or equity funds for that extra return and not include any credit risk funds in your portfolio.
Q: Is this a good time for a novice investor to enter equity markets?A: Yes, any time is a good time to enter the markets. People should not keep their money in banks and let it idle away. They should be investing it, for their money to work for them.
One should start investing in equity for long-term requirements, like retirement, and deposit money in fixed-income streams for short- and medium-term requirements, like higher education or marriage. The best time to start investing is now.
Q: What’s the one big lesson you have learnt from the debt credit crisis that we saw in the months leading up to the COVID-19 outbreak?A: One thing that I learnt a long time back and realised it again during the pandemic is to stay away from credit-risk products.
Also read | How credit crisis affected the Indian mutual funds industry
The yields of the credit paper went on decreasing with no rate cuts from the central bank. Later, I realised that the reason behind the same was the issuance of credit funds by a lot of mutual funds. So, if you were investing in these papers, at 14 percent, you can still justify it with your risk-return ratio, but investing in these funds at 10 percent returns, with one percent expense ratio, doesn’t make sense to take this high risk for a 9 percent return.
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I don’t recommend these types of risks, as I have never been a credit fund manager.
Second lesson: I realised a lot of people started buying floating-rate bonds as a protection in a rising interest-rate scenario. I agree that it does provide protection, but the downside to the same is that there won’t be any buyers when the cycle reverses. So liquidating these bonds becomes a challenge, which should be a big criteria while making investment decisions.
Q: How frequently should you change your asset allocation? Suppose we follow the thumb rule of 40 percent in equities and 60 percent in debt right now, and if the equity market goes up, do I rebalance it every month?A: I am positive both on the equity and the debt fronts. One can make money on the equity side also over a period of time, but that doesn’t mean they should keep changing their asset allocation too frequently.
Any major economic event that changes the way in which debt or equity market performs and a change in your short-term and long-term goals should only determine a change in your asset allocation.
Q: How long should investors keep their money in equities? Is it okay to sell equities in 2-3 years?A: One should always view equity investment as a very long-term kind of investment, and should not break it in a few years. For any goals that fall in the time range of 2-3 years, one should purely look at fixed income, and maintain an emergency fund for short-term uncertainties.
Q: Many fund houses have been launching target maturity funds as interest rates have been going up. Given that these funds are being launched as interest rates are expected to peak out, when is a good time to invest in them?A: Nobody can catch the peak or the bottom of the interest-rate cycle. While a lot of people who track inflation closely feel that interest rates peak when they reach about 7.75 percent, we have seen that, since 2016, the highest yield was below 7.75, around 85 percent of the time.
Just 14-15 percent of the time, the 10-year benchmark yield has crossed 7.75 percent.
So, we recommend investing in target maturity funds when the yield lies in the 7.5- 7.75 range.
Q: Just as we thought that COVID-19 is over, comes the grim news of rising infections in China. How big is this concern?A: COVID-19 can have a big impact on economic activities worldwide. It can again lead to an increase in asset prices, like those of oil, but it won’t have a significantly high impact, overall, like it did in March of 2020.
Apart from this, the Russia-Ukraine war was a big threat. It has now subsided. But geopolitical tensions always remain a concern. So, even internationally, investing should only be looked at as a diversification tool.
Q: What are some of the events to look out for in 2023 that can impact investors?A: As we are approaching the 2024 elections, budget 2023 can be a lot about the borrowing programme of the government. So that is one thing to watch out for. In addition to this, decreasing interest rates, fluctuations in oil prices, if any, and the rupee gradually gaining stability can be the factors that can impact the investment strategy of investors and make them review their portfolio.
Q: What is your own asset allocation?A: I use the mutual fund route for my investments. Seventy-five percent of my holdings are in equities, 20 percent in debt and the remaining in gold. This is because I mostly have only long- term goals -- my retirement and my child’s education.
But any new investments made by me at the moment will go into debt because of the sheer attractiveness of the debt market, right now.
Q: One big investment mantra?A: Don’t chase returns, without calculating the risks that come along.
