As investors navigate a volatile market and uncertain global conditions, debt mutual funds are once again drawing attention for their potential to provide steady returns and portfolio balance. In this interaction with BT, Murthy Nagarajan, Head of Fixed Income at Tata Asset Management, discusses how investors should position themselves in the current interest rate environment, where opportunities lie, and what to expect from the fixed income space soon. Edited excerpts
Q. What kind of investors should consider fixed income funds now?
Murthy Nagarajan: Investors who are traditional in bank Fixed Deposits and want to have some flexibility in terms of their withdrawal. Investors who are looking to have relative stability in their portfolio due to uncertainty in non-fixed income markets. Debt in an investor’s portfolio could be around 20 to 40% depending on the investor’s risk appetite and unique circumstances.
Q. How should investors position their portfolios in the current interest rate environment?
Nagarajan: RBI has indicated there is room for monetary policy to support growth. CPI inflation, as per the recent monetary policy, is expected to be 2.6% for the current year. This gives some space to cut rates to support growth. Given growth inflation dynamics and global low growth, there is space for the RBI to cut rates by 50 basis points in the coming months.
The yield curve is steep, with 10 to 40 years at 75 to 80 basis points. This makes long-term bond yields attractive on a comparative basis. RBI and the government have reduced supply in the long end of the yield curve, and the demand /supply has now come more into balance. Investors could increase duration products like gilt fund, corporate bond and short-term bond fund to take advantage of the expected fall in interest rates in the coming months.
Q. Which policy changes in recent years have most influenced India’s fixed-income market?
Nagarajan: RBI changing its stance from accommodative to neutral has led to ten-year and above bond yields moving higher than last year. This has wasted the repo rate cut of 100 basis points, CRR cut of 100 and RBI OMO of Rs 5.5 lakh crores.
Q. Where are the opportunities in fixed income MFs today, particularly in medium-duration and short-term funds?
Nagarajan: Expected fall in yields due to expected rate cuts makes gilt and corporate bonds an attractive investment. RBI and the Government are favourably inclined due to expected lower growth in the global economy and lower CPI inflation. Short-term bond funds to gilt funds are good investment opportunities in the coming months, depending on the risk appetite and time horizon of the investors.
Q. How can investors balance credit risk and returns effectively?
Nagarajan: Corporate India’s balance sheet is strong due to deleveraging in the past few years. Investors’ risk-return profile is favourable, due to buoyant capital markets. Investors should make the call of based on their expectations in the coming years on the Indian economy. We feel given global uncertainty, investors should hedge by reducing risk in the coming months and move to safer investments.
Q. How will inflation and global bond yields impact the returns for Indian debt funds?
Nagarajan: The outlook is positive. Lower global growth and reduced supply of long-dated bonds are likely to support bond prices and improve returns for Indian debt funds.
Q. Will passive debt products (like Bharat Bond ETFs) grow faster than actively managed debt funds?
Nagarajan: Not necessarily. Active management remains important, as interest rate cycles are now shorter and require more dynamic management to capture opportunities.
Q. If a retired investor has an Rs 50 lakh fixed income portfolio, is it realistic for him to target about 10% annual returns? How should he allocate his funds?
Nagarajan: No, a 10% risk-free return is not possible in the current interest rate environment. Investors should align their expectations with prevailing market yields and focus on building a balanced, risk-adjusted portfolio rather than chasing high returns.
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