Current yields are attractive from a medium- to long-term investment horizon, and debts schemes could see higher inflows, Puneet Pal, head of fixed income, PGIM India MF, told Siddhant Mishra in an interview. Pal says the short-duration category of 3-5 years offers a better risk-reward opportunity. Edited excerpts:
The RBI governor has kept the door open for further rate hikes. To what extent will this impact inflows into debt schemes?
Markets have already discounted a 25-bps rate hike for the April MPC meet. This hike may not impact bond markets much.
Markets also do not expect any change in the policy stance. We believe the current yields are attractive from a medium- to long-term investment horizon, and flows should pick up in debt schemes.
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What made the money market category stand out in January?
Money market funds were able to capture the rise in money market yields faster, given the lower duration.
With the money market category trading at quite an attractive yield — both from a real and nominal perspective — at above 7.50% and with the markets having discounted a rate hike in the April MPC meet with a very low probability of further hikes, the money market category offers very attractive and predictable returns to investors with an investment horizon of up to one year. Thus, we are seeing a decent investor interest in this category.
People are moving to alternatives like FDs, given the attractive rates offered by banks. Do you see this trend continuing?
Debt mutual funds offer an ideal investment opportunity at this juncture. In comparison to traditional savings instruments, debt funds offer better liquidity, tax efficiency, and can capture market yields faster.
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Which category/duration do you see doing well?
Given the expectations of a moderation in inflation and lower growth ahead, we believe the RBI is in the last phase of the rate hike cycle, and that we are close to a peak in terms of policy rates. As a result, the entire yield curve looks attractive to us.
Investors should choose funds based on their risk appetite and investment horizon. We would recommend investors to look at the short-duration category with 3-5 years of duration, which are overweight on sovereign bonds, as they offer a better risk-reward opportunity.
What’s your outlook on the 10-year benchmark bond yield?
We expect a range of 7.30% to 7.50% on the 10-year benchmark bond till the end of the financial year, as there is usually a year-end buying by real money investors. This, coupled with the lack of fresh supply, make us believe the 10-year bond will continue to trade in the range of 7.30% to 7.50%.
FPIs were net sellers in debt nine out of 12 months in CY22. In CY23, they have pumped in `6,000 crore the first two months. What has led to the buying?
A couple of factors have helped attract flows from FPIs. As the Indian Bond yields inched higher, they started giving a positive real rate of return — both with respect to current and expected future inflation. This was in contrast to negative real bond yields in the developed markets. Second, the rate hike cycle in India is in the last phase, and the current yield levels are attractive from a medium to long-term perspective.