Some debt funds poised for big gains

WHILE high inflation and high rate of growth continue to put upward pressure on interest rates, debt funds that hold securities for shorter duration and are focussed on accruals are set to outperform, said R Sivakumar, head of fixed income and products at Axis MF. In an interview with Bijoy Sankar Saikia, he said investors can also invest in short-term funds and FMPs for stable returns with lower interest rate risk. Excerpts: What is your outlook on interest rates? How will they affect returns of debt funds over the next one year?
The interest rate outlook depends on macro-economic and monetary factors. At present, with high growth and inflation rates, there continues to be an upward pressure on interest rates. The Reserve Bank of India has expressed its discomfort with the pace of inflation and is likely to keep liquidity tight and maintain a hawkish stance on interest rates. In such an environment, debt funds that focus on accruals (that is, hold securities for lower duration) are likely to outperform. Investors looking for stable returns have the option of investing in short-term funds and fixed maturity plans, where the interest rate risk is lower. Money market rates are quite attractive, as yields have risen by over 300 basis points over the year.
How has the limited entry of FIIs impacted the debt market?
Has this extra flow of liquidity affected yields?
The government has taken a positive step in increasing the quota for FIIs to invest in gilts and bonds.
The recently conducted auction saw good participation from FIIs for the gilt quota. We should see inflows over the coming days as FIIs purchase gilts. The FII buying should provide some support to the government bond market in the near term, though in the medium term macro factors will set the tone for the direction of yields.

What kind of a combination of bank CDs, corporate debt and gov ernment bonds do you keep in your debt portfolio?
We are maintaining a cautious stance in the present environment.
Our largest weights are in the money market (for example bank CDs). We have reduced exposure to corporate bonds and gilts. Our focus in fixed income funds is to reduce interest rate risks. We are also quality-focussed and have invested only in highly rated instruments.

Do debt funds often face a problem because of their inability to churn portfolios containing longterm debt instruments, thus not able to make the most of an emerging situation? The Indian debt market is in an evolving stage. The liquidity of debt instruments may be lower than ideal, but there is sufficient liquidity in high quality debt (gilts and toprated corporate bonds) for active management of debt portfolios. At the heart of the Axis MF investment philosophy is the focus on quality and liquidity of the portfolio.

Why do FMPs get most of the investment among all types of debt funds? Is it because they offer fixed returns or is it because companies park funds there?
FMPs are ideal products for investors who seek to limit interest rate risks. Typically, investors in fixed income instruments are looking for stable returns within a fixed horizon. In the mutual fund space, FMPs closely mimic these characteristics with stable returns and a fixed investment horizon. Corporate investors prefer shorter duration FMPs while retail investors invest across the maturity spectrum.

Among the various debt funds of different tenures, which ones are more popular with retail investors?
At Axis MF, we see more investor interest in short-term debt funds and hybrid funds (which combine debt with other asset classes). Investors in hybrid funds get the benefit of asset class diversification, which reduces risk at the same time offer the prospects of better returns compared with pure fixed income funds.

How many debt fund schemes Axis Mutual Fund offers at present and how do they stand vis-àvis bank fixed deposits in a rising interest rate scenario?
At present, we offer three debt funds (Axis Liquid Fund, Axis Treasury Advantage Fund and Axis Short Term Fund). Our fixed income funds are primarily invested in short-term money market instruments and are well positioned for the present interest rate scenario due to their lower durations.

In addition, we offer two hybrid funds (Axis Income Saver and Axis Triple Advantage Fund); in the first we combine debt with equity and in the second we combine debt with equity and gold. With these products, we aim to deliver investment solutions for different investment needs.