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“If your overall portfolio is a tree, debt funds are there to do the job of providing shade while equity funds bring the fruits and flowers. Fruits and flowers are seasonal products. You need that shade to stay intact as you wait for the fruits and flowers to bloom,” said Saurabh Bhatia, Head of Fixed Income at DSP Mutual Fund.
DSP MF was in news during the IL&FS and DHFL debt default crises, which hit some of its debt schemes very hard along with those of other fund houses.
But Bhatia, with more than 17 years of experience in the domestic fixed income market, remains unfazed. Even the recent exodus from debt funds does not worry him much.
“Avoiding risk was not the only reason for the spate of redemption that the mutual fund industry witnessed after the Franklin crisis,” he said.
The debt fund industry lost sizeable assets and the credit risk funds one-fourth of their asset under management after the leading fund house froze Rs 31,000 crore worth of assets by shutting six funds.
“There is a genuine demand for liquidity, as there are requirements for salary payments and business operations by corporates, which has driven money out of debt funds,” Bhatia said.
Franklin Templeton, which had high exposure to sub-AAA rated bonds, cited drying up of liquidity in bond market, which triggered panic among investors.
“The liquidity profile for AA-rated bonds is a bit lower,” Bhatia explained. “That does not mean there is no market for it, but the bid and ask spread has become wider,” he said.
Bhatia felt Indian regulators have not focused on the credit risk yet. “They are trying to address the illiquidity risk, and not credit risk.”
“When you drive on a very steep slope, it is important to use the brakes appropriately no matter how strong your vehicle is, so that you do not crash,” he said.
The top money manager, who handles Rs 34,943 crore in fixed income assets, said anyone seeking to put money in debt funds need to tick four boxes — liquidity, predictability, returns and lower volatility.
In financial markets, things play out at four stages — risk on, risk off, flight to safety and flight to liquidity. “From an asset class perspective, commodities and equity outperform in a risk-on mode; bonds excel in risk-off mode; and gold outshines in a flight-to-safety environment.
“In the flight-to-liquidity mode, only reserve currency, or the US dollar, outperforms; and that is the stage we have just entered,” he said.
Bhatia explained that unlike equity, debt funds are not that suitable for a systematic investment plan (SIP) approach to investing. “At best, it may be a good way to deploy money if you want a part of monthly earnings go into bonds.”
He said roll down funds – schemes that exploit the yield curve to try and maximize returns on bond yields – are most suitable to take care of liquidity predictability and lower volatility, while open-ended funds can be optimised to generate returns.
Bhatia felt India is best positioned going into this current crisis trigger by the coronavirus outbreak.
“In 2008 and 2013, there was a fair bit of refinance risk and growth momentum had to be abruptly stopped. Going into the current crisis, the growth momentum has been relatively slower and hence the extent of refinance risk will be lesser,” he said.
He said Indian regulators did not use all the ammunitions to spruce up growth despite slowdown in last 15-18 months and, hence, are well poised to use that arsenal now.
He said he expects RBI to address the yield situation in the government security market by releasing an OMO calendar, capping the extent of money that goes into reverse repo and monetising fiscal deficit.
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