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Expect rates to come down: Dinesh Ahuja
Tue, Oct 30, 2012
Source : Team Citrus Interactive

Dinesh Ahuja manages various fixed income schemes at SBI Funds Management Private Limited. The funds managed by him are SBI Dynamic Bond, SBI Magnum Gilt and SBI Magnum Income. He has a rich experience of managing debt schemes in his career spanning over 13 years. Before joining SBI he was a fund manager at L&T Investment Management Ltd. He has also been associated with Reliance Asset Management Ltd.  He has done his Master of Management Studies - Finance from University of Mumbai.

In an interview with Jeni Shukla and Shoaib Zaman, he shares his views on the RBI monetary policy, interest rate expectations and debt funds that investors can look at given the current interest rate scenario.

What are your views on the RBI monetary policy review which is due on October 30?
We are expecting RBI to cut CRR in this policy review by either 25 or 50 bps. There is a minor probability of a repo rate cut right now. The RBI could follow the CRR cut by conducting open market operations to infuse primary liquidity into the system. We expect RBI to cut repo rates from December onwards.

Which debt products are looking good given the current interest rate scenario?
We are very positive on interest rates. Our view is that rates will come down gradually. Just holding on to positions we will make enough money.

Government securities are looking very attractive from a demand-supply perspective. We are expecting RBI to buy INR 1 trillion worth of government securities from the secondary market up to March. Since credit off take is coming off banks have a natural appetite to buy G-secs. Typically when demand for funds reduces banks flock to government securities. In the last quarter typically demand from insurance companies (as they collect lot of premiums), and provident funds rises. Gilts also hold more value as unlike corporate bonds they have not rallied yet.

In a falling interest rate scenario longer duration funds do best. So if an investor has a higher risk appetite we recommend gilts and longer duration debt funds. For a moderate investor income and dynamic funds can be recommended. For those who are very conservative liquid and ultra short term can be the choice.

For investors who can take a 10-15 per cent exposure to equities, MIP could be a good category to invest. From a debt perspective we are very positive. Our in-house view on equities is that the government has taken initiatives and people are really under-invested in equities. With such a lot of money lying on the sidelines any positive news could bring in huge inflows.

SBI AMC is yet to lunch a credit opportunity fund. What is your view on this category?
Our in-house view is that in a slowing economy it doesn’t make sense to take a credit call. There is higher probability of more companies getting downgraded and defaulting. The duration play will give you enough money to compensate for the carry. Probably when the economy starts growing again one could look at credit opportunities and spreads. So we decided not to launch any credit opportunity fund right now.

You seem to be bullish on gilt funds. You have two gilt plans – SBI Magnum Short Term Plan (STP) and Long Term Plan (LTP). How different are the two?
In short term there is maturity restriction in terms of entire portfolio. So the weighted average maturity of the entire portfolio cannot be more than three years. In the Gilt LTP there is no such restriction. In Gilt LTP we have a minimum maturity duration. There is a three year minimum maturity. That is the difference. The LTP is more for aggressive players- someone who is really bullish on rates. The Gilt STP is actually not a product which is in fancy today. If somebody wants to take a gilt position he will take a long term position. If someone wants to invest in a short term product he/she will invest in a short term income fund so that at least he gets a higher carry there.
 
Our modified duration on the Gilt LTP is 8.5 years which reflects that we are very bullish on rates. We are maintaining duration across our categories.

Currently SBI Magnum Income Fund and SBI Dynamic Bond Fund have very similar portfolios. What differentiates the income and dynamic categories?
A dynamic category is a subset of the income fund category but with a lot more flexibility. In our income fund we cannot buy more than 90 per cent into government bonds, more than 25 per cent in money market instruments and more than 25 per cent cash. In the Dynamic bond fund flexibility is there with the fund manager in terms of maturity and asset allocation. So I can have 100 per cent into corporate bonds or 100 per cent into G-secs. I can have 100 per cent into a 30 year G-sec or I can have 100 per cent into a three-month CD. That is the flexibility that the fund manager has. This is very much in flavour in recent times. In 2008 lot of people invested in gilt funds and income funds and usually these funds have restrictions in terms of investments. RBI cut rates very aggressively and the rally was over in about 4 months. Most of these funds have one-year exit loads. So investors could not redeem because of the exit load and the fund manager could not reduce the duration because of the restrictions on him. So investors lost out. Though the dynamic bond fund has a one year exit load the fund manager has the flexibility to change the duration drastically.
 
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