Rajeev Radhakrishnan - Head Fixed Income, SBI Mutual Fund, in an interview with Himali Patel, explains given the credit market issues, the investor preference has been towards debt funds with a much conservative approach in credit allocations

 Why are a lot of people are getting attracted to debt funds and why it has become more attractive recently?

Debt funds have gained inflows based on the trend of softening interest rates and the associated capital gains that investors have made in debt-oriented funds. At the same time, we have seen a distinct trend of softer interest rates on other fixed income investment avenues like bank fixed deposits (FD’s). It must also be emphasised that given the credit market issues, the investor preference has been towards debt funds with a much conservative investment mandate in terms of credit allocations.

Any particular reasons why certain debt funds like a Long-Duration Bond, Corporate Bond Fund, Banking and PSU fund, Gilt Fund, and Gilt Fund with 10-year duration has really done well in terms of AUM and inflows Y-o-Y i.e. June 2019 vs. June 2020 and as well as a month on month?

The interest in the above-mentioned categories have been on account of the capital gains realised in the recent periods, combined with the underlying portfolio allocations that are predominantly in high grade securities such as AAA bonds including PSU/PFI and corporates and sovereign securities.

Similarly, the index funds and Gold ETF’s seen an increase in its AUM and inflow growth? Is this a new trend amidst such an uncertain time?

Interest in Gold ETF’s similarly may be reflecting the fact that gold prices have been on an upswing and have been the best performing asset class globally as well over the recent periods. Also, global market turbulences , uncertainty with respect to the event risks as well as declining real yields on risk free assets could be reasons that have underpinned a positive sentiment with regards gold prices. Inflows into Index funds are dominated by institutional flows.

What should be the investors’ overall course of action while investing in mutual funds today? What has been the growth and return when it comes to SIPs?

Mutual funds provide various product alternatives across debt and fixed income categories which can satisfy the financial investment requirements of various investors. Within the same investors should choose products in alignment with their individual risk appetite, investment tenures and liquidity requirements. This may include investment through SIP’s.

 What is your outlook on debt funds going forward in the next three months?

While the softer interest rate trend may continue for the near future, debt fund investors need to be mindful of the current yield levels across various segments, while calibrating their return expectations. Excessive system liquidity, RBI rate cuts, as well as unconventional measures such as Targeted Longer-Term Refinancing Operations (TLTRO’s), have ensured that money market rates and Shorter-term AAA yields have softened meaningfully in the recent period. On a relative basis, government securities and State Development Loans (SDL’s) provide more relative value.

himali@outlookindia.com