Macro View
This
week was a loaded one with a lot of crucial figures hitting the headlines. The
WPI figure rose to 6.84% versus the January figure of 6.62%. This followed by
the IIP and CPI which came in at 2.4% and 10.9% respectively. Although the IIP figures
seemed to be better than expected, the Inflation figures were bit
disappointing. The GDP figure remained stagnant at 4.8%. If we re-view these
figures in hind sight, headline inflation has dropped from a peak of 10% in
September 2011 which seems appealing. However the growth figures have dropped
drastically from 9% in Q1FY11. With the
re-view of monetary policy on the 19th of this month, RBI is in a
pressure situation with context to cutting interest rates. Despite WPI figures
spiking as on today, the good news is that the core inflation as an indicator
of demand side pressures on prices - fell below the 4.0 per cent mark for
the first time in past 35 months, strengthening the case for a repo rate cut by
the RBI on March 19, 2013.
Why
is rate cut imperative?
GDP has
been on a decline for a pretty long time and the further it deteriorates; the
tougher it is to pull it back to the growth phase. One of the impediments to
growth is a higher interest rate. But with Inflation ruling high, RBI was not
able to lower the rates without it impacting the economy in other ways. But
with core inflation finally cooling off and government promising to spend less,
which in turn shall mean a lower pressure on funds, a rate cut via Repo maybe
on the cards when RBI meets at its policy meet on 19th March 2013.
Impact
on Debt Funds
Macro
economic factors impact interest rates which in turn affect bond yields and
bond prices. The announcement of a higher WPI number, yield rates went up, but
dropped 5 bps as core inflation moderated. So based on all the above
parameters, I anticipate interest rate (repo) to be cut and as a result, bond
prices will go up to adjust for the lower interest rate scenario that shall get
played out.
At
this juncture, the question we should ask is, if the interest rates in India
are turning around, what fund in the debt segment should one invest?
The
answer to this ultimately depends on the horizon of the investor. The short
term debt fund is good for a tenure that is less than a year. The factors that
become more pertinent are the liquidity situation and thus a CRR rate cut would
imply better returns on a short term fund. However, for an investor who is
comfortable locking in funds for a long term, this is a good time to invest in
long term bonds funds to ensure that he locks up his funds at the current
yields which are reasonably higher than what can be got in the future when RBI
starts to cut interest rates to stimulate the economy.
Where
to Invest?
With a plethora of funds available
in the Mutual Funds – Debt segment, it is important to pick the appropriate fund.
After evaluating the macro scenario and the debt investment duration, the fund
evaluation is the last step to the process. The long term debt fund involves
Income Funds, Gilt Funds and Dynamic Bond Funds.
The top 3 picks are:-
·
IDFC
SSI Invest A (G):- This fund was launched way back in June
‘2000 and is managed by Mr. Suyash Choudhary. The fund has managed to sustain
itself in the top quartile of funds, year on year which exhibits consistency in
performance. It has delivered a return of 12.37% in the last one year and a
return of 8.57% since the launch. The average credit rating has been AAA. The
number of holdings is 17 with an average maturity being 2 years.
·
UTI
Bond Fund: - Another good income fund which
occasionally is unpleasant, but mostly it’s about pleasant surprises. It found
itself amongst the top five twice; once in 2005 and the other instance in 2011.
In recent times, the fund is seen to more actively manage its maturity bets. It
is fairly consistent in its performance which does not deviate too far from the
category average and has a long term track record to back it up. The fund
maintains a high quality portfolio with majority of the investments into
debentures and government securities.
·
Morgan
Stanley Active Bond Fund: - With an inception as
late as 2009, the fund has picked momentum and is one of the best performing
funds. It had its share of initial glitches; however we anticipate a good show
in the times to come. It is a fund for investors with lower risk appetite with
a portfolio of just 10 securities and an average maturity of 3.18 years. The
quality of security is good and well maneuvered by Mr Ritesh Jain.
