ETMarkets Fund Manager Talk: Debt funds poised for decent inflows in 2023 as rates close to pivot point: Akhil Mittal, Tata AMC

“With interest rates at elevated levels, time decay will likely result in lower volatility and, hence, stability in markets. This would bode well for FI markets and we believe debt funds are poised to see decent inflows in 2023,” Mittal told ETMarkets in an interview.

Edited excerpts:

The last 2 years weren’t good for the fixed income market as debt funds saw heavy outflows. Do you see this tide turning in 2023?
The last 2 years were indeed tough for FI markets as we saw structural change in rates and monetary policies world-wide. As we stand today, a large part of the rate shift is already behind us and we are close to the pivot point in rates.

With interest rates at elevated levels, time decay will likely result in lower volatility and, hence, stability in markets.
This would bode well for FI markets and hence, we believe debt funds are poised to see decent inflows in 2023.

Which are the funds you directly oversee and how have they performed?
I manage ultra short term, low duration, floating rate and gilt fund within fixed income space and debt portion of some hybrid funds. The funds have performed decently over the last 1-2 years with larger focus on conservation and maintaining safe accrual for the funds. Lower volatility and positioning in a cycle was core to strategy rather than chasing alpha.

Do you think interest rates will peak this year? If yes, will this make short or long duration funds lucrative?
I believe a large part of rate move is behind us and we are closer to the top of rates/yields. Any further up-shift (from what is already discounted in markets) would have lesser impact on markets. I believe inflation will start coming down structurally and growth will also start lagging. So, central banks are likely to halt soon, in for a pause thereafter, eventually leading to easing cycle.

Current yield curve is largely flat in India, flattish to inverse globally, indicating similar pricing of risk across term structure.

Given this background, I believe long duration funds would be a lucrative bet for long term investors as the accruals are very high and as inflation comes down/policy rates ease, there would be scope for making higher profits.

The Dewan Housing and IL&FS scams shook a lot of confidence in debt fund investors. Can Adani Group fiasco also impact in a similar way or do you think this is just a group-specific issue?
Exposure to Adani group in capital markets is much smaller, so we do not anticipate any stress on debt funds w.r.t to the group.

However, some groups/companies which have some common features (high share pledging etc) might witness greater due-diligence from investors.

At a time when equities are volatile, for investors looking for both risk and growth protection, would investing in hybrid funds make sense?
Hybrid funds are designed for balancing risks across asset classes. Higher interest rates would mean higher accrual to debt portfolio, which increases protection and allocation to equity would keep growth side participation open. So, in the current cycle, hybrid funds do make case for investors seeking to balance their investments on lines of embedded risk.

With FD rates inching higher in India, do you think this will shift investors to them from debt funds?
Both FDs and debt funds operate in the same rate structure in the market, but have different characteristics. Where FDs provide definitive return features, low liquidity (at a cost) and taxation on interest income are inefficient features of FDs. Debt funds on the other hand, do give better liquidity option, tax effectiveness (Long term tax post indexation) and keep upside return possibility open in case of interest rates coming down. Given these distinctions, I think debt funds may see higher inflows and even get some more share of the FD market.

What kind of exposure would you recommend to investors between government bonds and corporate debt instruments in their portfolio?
The spreads between corporate bonds and similar duration government securities are below long-term averages currently. So, on an analytical basis, higher allocation to government bonds makes more sense.

If private capex picks up this year with higher spending by the government, will we see increasing activity in the corporate debt market?
Yes, incrementally increased private capex would mean higher demand for funds by the private sector and hence, higher primary market activity.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)