However, Deepak Agrawal of Kotak Mahindra Mutual Fund doesn’t see the amendments having significant impact on the participation.
“We don’t see much impact in investors’ participation in debt funds, as investors would continue to choose debt funds products due to professional management, easy liquidity and actively managed diversified portfolio,” Agrawal, CIO – Fixed Income and Head Products at India’s fifth largest AMC told ETMarkets in an interview. Edited excerpts:
After the latest inflation print, do you see scope for a longer pause on rate hikes by the RBI or is it too early to draw a conclusion?
Based on the latest inflation print, average inflation for FY24 is expected to be lower than RBI’s FY24 forecast of 5.20%. At 6.5% repo, the real rate based on 1-year forward inflation is upward of 130 bps. Hence, the case for a long pause on repo rate at 6.5% has strengthened.
We are seeing flat to inverted yield curves across markets now. Do you think this is likely to prevail for some time, particularly in the US?
The yield curve in the US is inverted. We expect inversion to continue with the first curve to shift downwards as the market anticipates a pivot by the US Fed and on actual cut, we expect the curve to steepen in the US.
In India, the yield curve is flat. Based on expectation of Fed Pivot and likely easing, we would first see a parallel downward shift in yield and then a steepening in yield curve on actual cuts due to relatively heavy supply of Gsec at the longer end of the curve
In March, we saw more than Rs 56,000 crore of outflows in the debt category, with most of it in the liquid and money market categories. What are the factors behind this and do you see this continuing in the coming months?
This is a yearly phenomenon, where Liquid Fund and MM categories see outflows due to advance tax payment and normal treasury management at the end of the financial year. We don’t expect this to be a regular phenomenon and expect inflows in liquid and money market categories in the months ahead.
Hybrid funds saw outflows in March after witnessing inflows in the preceding 3 months. Would you call it a one-off event?
Yes. This is likely to be a one-off event. Due to tax changes with respect to debt mutual fund schemes, investors have redeemed from hybrid schemes (largely from arbitrage schemes) and invested in debt schemes to take advantage of indexation and long-term capital gains.
To what extent could the tax amendments in debt funds affect investor participation? Do you think this will trigger the need for tweaking products significantly to drive participation?
We don’t expect any significant tweaking in the current MF debt schemes. We don’t see much impact in investors’ participation in debt funds, as investors would continue to choose debt funds products due to professional management, easy liquidity and actively managed diversified portfolio.
Do you think the removal of LTCG would attract more investment in categories such as target maturity funds, corporate bonds, and dynamic bonds?
Due to the benefits mentioned above, all debt funds, including target maturity funds, corporate bond funds and dynamic bond funds would continue to attract investments.
Recently, SEBI approved setting up a “Corporate Debt Market Development Fund” to act as a “backstop” facility. Your thoughts about this.
This is a positive development. It will help the fund to generate liquidity in illiquid assets during periods of extreme market dislocation.
Several regulatory and taxation changes have taken place in the debt mutual fund category. Do you think this will push investors to traditional categories like bank FDs or other fixed income instruments?
Regulatory changes carried out over a period of time has been in the interest of investors and has aided in the growth of the debt mutual fund category. Tax arbitrage wasn’t the only reason why investors chose debt funds. Investors will continue to choose debt mutual funds due to professional management, easy liquidity and actively managed diversified portfolio along with other fixed income options.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)
