Interest rates are likely to trend lower and there could be one more cut in the repo rate between now and March, says Lakshmi Iyer, Chief Investment Officer-Debt and Head-Products at Kotak Mahindra Mutual Fund in an interview to moneycontrol.com.
Iyer recommends investors to deploy 80-85 percent in medium term funds or accrual based strategies and the remainder in actively managed gilt and bond funds which run a long duration.
Generally, when interest rates are trending lower, long-term debt funds are a good place to be in because when interest rates fall, the value of older bonds—offering higher interest rates—in the portfolio increases in value.
An avid traveler, movie buff and food connoisseur, Iyer has been in the fund management business for 16 years now. At Kotak, she manages around Rs 52,530.39 crore across 20 debt funds and 2 gold schemes.
Iyer sees demand for short term papers such as certificates of deposits and commercial papers issuances to remain strong as mutual funds and non-banking finance companies are actively participating in the short-term market. She said mutual funds are also looking at three to five-year categories for investments.
Iyer is of the view that rates on one-year to three-year certificate of deposits to fall by 20-30 basis points. Currently, one-year certificate of deposits are offered in the range of 6.60-6.75 percent.
Iyer says inflows into her firm’s short-term funds, ultra short term funds and liquid schemes are robust, while investor interest in duration funds is tepid for now.
The liquid funds are seeing some outflows as well, but Iyer says that is a seasonal trend. “September being a month-end and also a quarter end we have seen outflows but that’s typically a month end phenomenon,” she says.
“The overall system so very comfortable with the liquidity I don’t really see outflows in liquid funds a big challenge for now,” she says.
Liquid plans are used by companies for surplus cash management. Since liquid plans do not levy any entry and exit fee, they facilitate easy cash management.
Normally, companies rush to redeem their investments from cash plans every quarter to meet advance tax payment commitments. Companies pay advance tax in four instalments of 15 percent, 30 percent, 30 percent, and 25 percent on June 15, September 15, December 15, and March 15, respectively.
Iyer expects liquidity situation in the system to remain in the moderate to neutral zone.
She said: “Despite FCNR related outflows this month, festive demand leading to currency circulation is going higher, we believe that the commitment to manage liquidity in the moderate to neutral zone should keep the current situation status quo. So we are not overtly concerned about liquidity drying up.”
She expects appetite for corporate bonds to sustain and even improve on increased demand from foreign institutional investors.
On 10-year benchmark bond yields, Iyer said the 10-year 6.97 percent benchmark 2026 bond is trading almost 30 basis points lower from where it was issued. She expects this bond which is currently hovering around 6.70 percent to gradually edge lower towards 6.50 percent. She also does not rule out the possibility it falling as low as 6 percent levels early next year.
Iyer sees inflation to remain well within Reserve Bank of India’s target of 5.3 percent by March 2017. She does not expect a big swing in crude oil prices or the rupee on either side.
“Closer to maybe 67-67.20 (levels), there would be a high chance of RBI stepping in to shore up its FX reserves,” says Iyer.
She is unexcited about gold as an investment bet, and sees gold prices remaining range-bound with a downward bias.
“When the US rate hike decision becomes a reality, the probability of gold underperforming is higher,” says Iyer.
According to conventional wisdom, higher interest rates will prompt investors to shift money from commodities into US government bonds.
“Globally, hedge funds have been adding long positions so we see some amount of liquidation pressurizing gold prices,” Iyer added.