Mutual funds operate as pass-through vehicles, committed to servicing redemptions within a T+3 window regardless of market conditions. So, prioritising liquidity is crucial in your investment deliberations. Rahul Singh, Senior Fund Manager – Fixed Income of LIC Mutual Fund Asset Management Ltd, in a conversation with Money Today, speaks about the surge in inflows into debt funds during the current financial year (FY23).
Edited excerpts:
BT: Can you discuss your approach to selecting debt securities in a volatile market, emphasising liquidity and credit quality?
RS: Mutual funds are a pass-through vehicle; irrespective of market conditions, we need to service our redemption on a T+3 basis. So, liquidity is an important criterion while making investment decisions. In a volatile market, it’s even more important to ensure the portfolio is relatively liquid, not only to service redemptions if they come but also to have the flexibility to buy/sell and book profits. So, the ideal strategy is to invest in highly liquid and good credit quality papers, which are highly acceptable in the market to move in and out based on liquidity and Interest rate calls.
BT: How do you balance the need to efficiently deploy the inflows into debt funds while ensuring the portfolio’s liquidity?
RS: Inflows in the debt market, especially after the removal of long-term indexation benefits, are primarily driven by Interest rate movements. If the yields are attractive, the volume of flows goes up and vice versa. The liquidity of the paper is a big consideration, along with the duration of the instrument, to ensure the portfolio is relatively liquid and there is sufficient opportunity to take advantage of Market capital gains as and when rates move down.
BT: How do you approach portfolio diversification in the context of increased inflows in the current financial year, and what strategies do you employ to enhance portfolio yield?
RS: Liquidity in the portfolio and YTM (yield to maturity) are two sides of the same coin, and every portfolio manager has to keep the right balance between the two. Of course, every portfolio manager would have a different approach, considering the investor base and size of the scheme. To increase the YTM, one can invest in lower-rated (
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BT: Since the market is doing really well right now, how can people who invest in debt make the most of it?
RS: Currently, the yields are attractive, and we are at the far end of the rate hike cycle. In the next 2 years, with inflation expected to come down and growth taking centre stage, there could be significant gains in market capital. Though redemption is T+3, the instant redemption facility provides an opportunity to take out up to 50000 on a T+0 basis from liquid funds.
BT: How will the upcoming election affect the debt market?
RS: Historically, elections have led to a spike in inflation as the government provides many freebies, and poll promises are given on a large scale. With 2024 being an election year, it may contribute to inflation. This is a concern. However, a decisive mandate to a particular political party will go a long way in soothing inflation in a huge way.
BT: What strategies do you suggest for bond investors?
RS: As yields are attractive, one can invest in duration funds for a period of 2-3 years to take advantage of mark-to-market capital gains.