Comparing debt funds to FDs is too simplistic: Mahendra Jajoo, Mirae Asset Global Investments
Debt funds have seen several rounds of severe volatility over time and successfully met the challenge. However, each such episode does leave its own destructive trail.
How would you assess the credit profile of India Inc? Are more credit events likely?
India’s GDP growth has been slowing down over the past few quarters. This slowdown has in part been triggered by global developments. On the domestic front, the credit squeeze following the unexpected default by IL&FS and the more recent defaults have led to difficulties in raising fresh resources. NBFCs have been among the main growth drivers for the economy in the past decade and difficulties in this segment have percolated to other segments, resulting in demand contraction. The corporate sector is focused on normalising past over-leveraging and over capacity.
With rollover funding becoming a challenge, the credit situation has become very difficult. While mutual funds have had some troubling times, the industry sailed through the phase with minimal casualties. While we believe that the worst is over on the credit front, there could still be some after effects. Nevertheless, no specific major event that could hit the industry adversely is apparent as the investors and fund managers have become cautious.
How are you looking at NBFC credit in light of the recent problems? Are you being more selective?
It is only natural to be extremely cautious and stay away from anything that has the slightest possibility of causing trouble. Our core approach has always been to shun aggressive credit positioning. This helped us avoid any major setbacks in the current round. We remain very selective in defining our universe. Strongly risk averse, lenders are reluctant to offer fresh funding to NBFCs, barring a few top names.
Several debt MFs have witnessed huge redemptions in recent months. What problems does this pose for the fund manager?
Overall AUM data of flows into debt mutual funds does not support that perception. On a net basis and after adjusting for cyclical factors, fixed income AUM may actually be higher this month compared to the same time last year. However, some categories like credit risk funds and corporate bond funds would have witnessed net outflows.
Immediately after the September event, there were some panic redemptions and debt AUM went down. The same debt funds saw a decrease of over 5%, which is fairly manageable. Debt funds have seen several rounds of severe volatility over time and successfully met the challenge. However, each such episode does leave its own destructive trail.
Will recently introduced norms restore faith of investors in debt funds?
The recent changes seem to be quite comprehensive and will address some of the longdebated issues. These changes should significantly help improve risk management, liquidity and transparency in debt mutual fund portfolios. While the faith has already been restored, the proposed changes will further strengthen it.
Does it not make sense to have credit quality limits on debt funds, like duration limits?
Credit is a function of fundamental analysis and the recent examples make it clear that institutions need to have their own rating model and dedicated credit analysis personnel. Relying on external rating agencies will not be enough. We have seen AAA rated companies default in quick time. Therefore, setting credit limits will not help. Focus should be on improving credit analysis.
Bond markets have rallied sharply. Is there room for yields to soften further?
The global and domestic growth outlook is subdued at a time when inflation globally remains below the central bank’s target. With little to no space for fiscal expansion and with high real interest rates in India presently, the only likely way out is further monetary policy easing. Keeping that in mind we see bond yields continuing to ease in the near term.
What should investors do if debt funds in their portfolios see multiple defaults?
There is no smoke without fire. So if any investor experiences a default or any other unusual or abnormal activity in his fund, he should immediately review his portfolio. There is no merit in crying over spilt milk. Investors should figure what additional losses may occur and rebalance portfolios.
What type of debt funds are better placed in the current environment?
It depends on whether you are investing for the long term or short term and the risk appetite. The key is to look at debt as an integral asset allocation part of overall investment. One needs to realise debt funds are market related products with associated features like volatility, risk and periods of negative returns. Comparing debt funds to FDs and expecting them to outperform FD returns without any additional complication or risk is too simplistic.
Debt funds would typically generate superior returns for investors who are willing to get over their fear of volatility and don’t seek the safety of FD in a market related product. Longer the investment horizon, lesser is the ability to predict future outcomes. One should avoid knowingly investing in aggressive credits or to remain invested in funds with aggressive credits. Apart from this, those with short term horizon may choose liquid/low duration funds. Those with medium- to long- term horizon may choose short-term funds or corporate bond funds depending on the risk appetite.