market risks: Credit risk is for real… look deeper into portfolio quality: Murthy Nagarajan, Tata Mutual Fund

Fixed-income mutual funds, once the preferred vehicles for securing returns significantly higher than those offered by fixed deposits, may now have to factor in slightly lower returns than usual as fund managers switch to better-rated bonds to avoid default risks, Murthy Nagarajan, head-fixed income, Tata Mutual Fund, tells Saikat Das. Edited excerpts:

What lessons should investors learn from the latest capital crisis?

One thing investors should take away from the recent crisis is that credit risk is for real. In normal markets, it was life as usual and higher accruals resulting from higher credit risk were not really considered as something which would translate into capital losses. However, with things having turned around and credit risk resulting into losses, investors would now have to look deeper into the quality of portfolios, align return expectations, and give higher consideration to asset allocation and strategies within asset class.

Is the worst over for the debt capital markets?

We believe the market is factoring in most of the risks at this point of time. Many risks have already materialised and there is a coherent effort not to face any further shock. Government support, regulatory vigil and readiness to respond, and aggressive look out for funding / balance sheet management by some stressed companies, would provide some stability and halt worsening of sentiments. With the sluggish economy and woes of the real estate sector, there is limited organic impetus for many finance companies which are facing the heat currently. So, I would say one day at a time, getting better by the day, but still not completely out of the woods.

What needs to be done to allay investor apprehension?

Rumours and fear mongering do add fuel to fire, especially in capital markets. We have seen many companies taking proactive steps and coming forward with information like asset liability reports, capital raising plans and in some cases, legal updates. We are passing through a tough cycle, and it is imperative that we understand issues in depth before either embracing or endorsing stated headlines. All stakeholders including companies, regulators, investors and shareholders can be more upcoming with facts / information and investors at their end should verify any news before acting upon it.

How have you changed your investment strategy in the past one year?

Every cycle and all economic developments teach and shape up investment strategies in a continuous manner. In current cycle of credit crisis, we have added stricter risk parameters, and realigned the risk return paradigm.

What is your take on interest rates going forward?

Factors shaping up interest rates are inflation, growth, liquidity, fiscal stance, transmission, and global factors including geopolitics. With inflation largely within RBI’s target and sluggish growth, RBI has maintained accommodative stance and there is a likely chance for another rate cut in the December policy. We believe that 5% of close thereabout could be the terminal rate in this cycle if the inflation and growth trajectory are to follow as projected. In case of any further downside shock in growth, we cannot rule out one more cut thereafter. RBI is likely to keep liquidity in a very comfortable zone.

What is your take on bond yields?

We believe the yield curve will steepen with shorter end of curve remaining anchored and longer end of curve inching higher. We see the 5-year benchmark G-Sec trading in range of 6.1 5% – 6.35% and 10 year benchmark (new paper) to trade in range of 6.35%-6.65%. We remain constructive on debt markets, however more comfortable on the shorter end of the curve. The longer end of the curve might also deliver decent returns, but there would be volatility in the near term.

Investors are shying away from debt mutual funds to safer bank fixed deposits. How do you propose to bring them back?

Volatile cycles generally bring sharp reactions. It is understandable that many investors who have faced losses in debt funds are shifting toward bank fixed deposits. Over a period of time investors who have shifted away from debt mutual funds would set their objectives on risk reward paradigm and have a relook at debt funds once things stabilise. Until such time, we would continue strengthening our investment process, enhance our capabilities and communicate the same with the investors to regain their confidence.

Should secured and unsecured investors be treated on the same page?

There is a basic difference between being a secured investor and an unsecured investor. Law provides investors seniority or ability to recover through process of liquidation of security. It both secured and unsecured investors (irrespective of their status of incorporation) are treated on the same page, then it defeats the basic premise of law and seniority therein.

Is the bond street falling in line after corporates are mandated to borrow from it?

The mandate would definitely deepen the bond market with more issuers coming to the market; investors would get greater choice across sectors and credit quality. We believe it would be a big positive for the markets over a period of time.

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