PGIM India Mutual Fund expects the banking system liquidity to turn negative by October this year.
“This can put pressure on corporate spreads. Thus, we recommend investors to be overweight on government bonds relative to corporate bonds at this juncture,” said Puneet Pal, head – fixed income at the fund house, in an interview with ETMarkets.
The last 2 years weren’t good for the fixed income market, with debt funds seeing heavy outflows. Do you see this tide turning in 2023?
Yes, we may see inflows improving in debt mutual funds as we expect yields to stabilise after the sharp up move last year. The returns may also improve with yields stabilising, offering a higher accrual to investors as we approach the last phase of the rate hiking cycle in India and globally.
Which are the funds you directly oversee and how have they performed?
I oversee the entire fixed income vertical. Our performance has been reasonable across funds on a risk-adjusted basis. The PGIM India Dynamic Bond Fund was ranked CRISIL CPR 1 under the direct plan for the quarter ended December.
You said we are approaching the last phase of the rate hike cycle. Will this make short duration funds lucrative or long duration funds?
We believe that rates will peak this year as we expect inflation to moderate to below 6% in the next few quarters. The entire curve looks attractive from a medium to long term investment perspective as the real yields are positive across the curve with respect to the current and expected future inflation.
We believe investors should increase their overall fixed income allocation. We could be in the last phase of the rate hiking cycle and the 3-5 year segment of the yield curve looks attractive.
The longer end of the curve can be volatile and investors who can withstand this risk, can consider investing at the long end of the curve.
With FD rates inching higher in India, do you think this will shift investors to them from debt funds?
In our view, debt mutual funds are relatively better investment vehicle as compared to traditional savings instruments as mutual funds offer better liquidity and tax-efficiency. Investors can choose a category which fits their risk appetite and investment horizon.
What kind of exposure would you recommend to investors between government bonds and corporate debt instruments in their portfolio?
The current spread between government securities and corporate bonds is pretty tight relatively to their historic median spread, especially at the longer end of the curve. The surplus liquidity in the banking system has come down from the highs of last year. We expect the banking system liquidity to turn negative by October 2023. This can put
pressure on corporate spreads. Thus, we recommend investors to be overweight on government bonds relative to corporate bonds at this juncture.
For investors looking for long-term returns, will target maturity funds be a better option or fixed maturity plans?
The basic difference between Target Maturity Funds and FMPs is that Target Maturity Funds are open-ended whereas FMPs are close-ended. As Target Maturity Funds are open ended and provide better liquidity, they are a better alternative.
If private capex picks up this year with higher spending by the government, will we see increasing activity in the corporate debt market?
The credit growth has been healthy in FY23 with the banking credit growing at 16%. Consequently, this has led to an increase in CD issuance by banks. If this trend of credit growth continues, we expect corporate bond issuances to also pick up in FY24.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)