Mr. Mahendra Jajoo on Short Duration Category Funds

OutlookIndia

How to invest in Short Duration Category Funds? Join us as Mr. Mahendra Jajoo, CIO - Fixed Income, Mirae Asset Investment Managers (India) Private Limited , tries to de-mystify and answer these and many more such questions surrounding these funds. A few topics which he discusses are:   • The overall outlook on interest rates and debt funds • Why consider these funds in the much-anticipated debt market volatility, and • Corporate bond fund category vs other debt fund categories and traditional fixed income So, if you are looking to add Short Duration Category Funds to your portfolio, watch the complete interview.  #Money #OutlookMoney #OutlookMagazine #OutlookGroup

Transcript

00:00 Hello and a warm welcome to all. For those of you tuning in for the first time, Outlook

00:11 Money and Mirai Assets Investor Education Series welcomes you, you savvy investors.

00:17 To all our followers, we thank you again for showing and showering your love yet again.

00:23 Before we start, sir, what's the best, the simplest, the golden financial advice you

00:30 would want to share with a lovely audience member?

00:33 The golden investment advice always is to match the investor's risk profile with the

00:40 product in which they invest. They should always understand that markets are always

00:45 going to be volatile. There is no free lunch. They have to embrace volatility and that's

00:50 the time they can maximize their returns.

00:54 There's no free lunch. I think that holds true for just about anything in this world.

00:58 That was absolutely fantastic. And that, ladies and gentlemen, was just a teaser of what is

01:05 in store ahead. We have with us none other than Mr. Mahendra Kumar Jaju, Chief Investment

01:11 Officer, Fixed Income Mirai Asset Investment Managers. He has over 25 years of experience

01:17 in financial services, including 11 in fixed income funds management. He's also responsible

01:23 for the overall supervision of all debt schemes of Mirai Asset Mutual Fund. And on that note,

01:29 I, Nikita Rana, your moderator of the session, welcomes you. And I might want to take a long

01:35 break for it on how to invest in short duration category funds to tackle debt market volatility

01:42 and create good investment experience, short term corporate bond fund, banking PSU, debt

01:48 fund. Mr. Jaju, ironically, that's quite a long title to short funds. Don't you agree?

01:56 Well, it looks very complicated from the outside, because most of the time when we engage with

02:02 the distributors or the investors, one of the common feedback is that debt funds are

02:07 complicated, but I believe that it's not so complicated, maybe there is a gap in terms

02:13 of the awareness. So, there are three broad categories of debt funds. The one are the

02:19 very short term, like the liquid funds or the ultra short duration fund, where typically

02:24 investors invest the money which they have with them for a short term, which is there

02:29 for a specific purpose or where they want zero volatility or possibility of a capital

02:34 loss. And then you have the mid range funds, typically represented by the short duration

02:40 funds. And then you have the long bond fund, which is where your banking PSU fund or the

02:47 corporate bond funds will come. So, I think it's a relatively easy choice once the investors

02:53 know what is their risk appetite, what is their risk profile, what is the objective

02:57 of their investment. And therefore, I think if they cut the clutter out, simple thing

03:04 is that if you have short term money, invest in the short, I mean, the liquid funds or

03:09 the short end of the curve. If you have money for the, let's say two to three years, you

03:15 don't want too much volatility, invest in the short term fund which you referred to,

03:20 and then people who want to go aggressive, who want to take higher volatility and in

03:27 return want higher yield, who have money for long term, who don't need it immediately,

03:32 for them, those funds have historically provided very good returns.

03:36 Mr. Jaju, you've set so much context. So before we begin, we'd like to thank you for taking

03:42 time out and sharing your knowledge to potential investors across the country. Our very first

03:48 question to you is, Mr. Jaju, what is your outlook and perspective on interest rates

03:54 and debt paths?

03:55 So right now, we are going through a once in a lifetime kind of a pandemic situation,

04:02 which has made life very challenging for all of us. At this moment, India is dealing with

04:09 a huge spike in the COVID cases. And this second wave has been very, very infectious.

04:17 And we have also seen the number of people in the young age getting affected more. Now,

04:24 one of the inevitable outcome of the current situation is that a large part of the country

04:30 is currently under lockdown. And going by the current situation, it is likely that the

04:34 lockdowns will be extended. And the natural cascading impact of that is going to be on

04:42 the economic growth prospects. So it is fair to assume that there will be some impact on

04:49 the economic growth prospect. Right now, the impact is likely to be at the margin, there

04:55 is not likely to be any big scale downgrade of the economic growth forecast. But the moment

05:02 the economic growth projections have to be lowered, there are challenges in terms of

05:07 the revenue collections and therefore on the fiscal deficit. And we have seen in the last

05:13 one year that the Reserve Bank has adopted an ultra loose monetary policy with two primary

05:18 objectives. One was to stabilize financial markets, when the lockdowns were imposed last

05:23 year, and there was a lot of uncertainty. And then beginning July, when the lockdowns

05:28 were gradually removed, that time to continue to support the economic recovery, and we are

05:33 facing a situation which is far more, you know, dire than in the last year. So I would

05:41 like to believe that the Reserve Bank will continue to follow a very, very accommodative

05:46 monetary policy stance. And therefore, we should expect interest rates to remain range

05:51 bound. Interest rates are already at a historical low level. And therefore, given the challenges

05:57 that we have, especially in terms of the possibility of further increase in the fiscal deficit

06:03 projections, and therefore, interest rates do not have a big headway to go down from

06:09 the current levels. But at the same time, given the growth concerns, the Reserve Bank

06:15 is likely to continue with aggressive intervention in the market. And therefore, I would believe

06:20 at this point in time that the interest rates are likely to be range bound, with any meaningful

06:26 upside being arrested through the Reserve Bank's intervention, and with the markets

06:30 not having tailwind of fundamentals to take interest rates lower. So we are, I think,

06:35 due for a range bound interest rate environment. The risk obviously comes from two factors.

06:42 One, if the global interest rates start to go up, because there is a lot of narrative

06:47 right now, the global advanced countries that inflation may go up. And second is if the

06:52 FPIs start withdrawing from India, then that outflow can lead to a cascading impact. So

06:58 these are the two factors one needs to monitor carefully. But I think that, as I said, the

07:06 interest rates are likely to be bound in the near term.

07:09 Mr. Raju, you touched upon the cascading effect and that is something that we absolutely loved.

07:14 How you took into consideration everything, the current scenarios and how it is affecting

07:20 the interest rates and the debt markets. Mr. Raju, with the entire industry vying for long-term

07:26 funds because of risk aversion, why should you, why should investors go for short duration

07:33 funds considering that they will have to face the much anticipated debt market volatility?

07:39 Look, as I mentioned about the golden rule, volatility is always going to be the integral

07:45 part of the market. So I think what more than the volatility, the investors should look

07:52 at their own risk profile and see whether their risk profile warrants that volatility

07:57 because if they take excessive risk, it can be damaging to them. But if they underplay

08:04 the risk, that also is a lost opportunity in many ways. So like we say in the markets,

08:10 not investing is itself a risk. So putting that in the context, we have to look at the

08:17 bucket of investors or the bracket of investors for whom these funds might be suitable. And

08:24 then we say, okay, what are the risks of investing in short duration funds? So short duration

08:31 funds, as I again mentioned in the beginning, that broadly speaking, three categories of

08:35 funds. So the short durations are a good fit in the current situation because we are going

08:41 through a lot of uncertainty. We had a very difficult situation last year and then by

08:48 January, February, everyone began to believe that India will not face a second wave and

08:53 look at how ruthless and deadly has been the second wave. So all within a span of end of

09:01 February to the end of April, two months can change everything. So the point I'm trying

09:08 to emphasize is that no one can claim to know what will happen the next month or the next

09:13 year and therefore, the investments have to account for uncertainty and the possible resultant

09:20 volatility and then ensure that after taking into account that the investments are able

09:27 to generate a reasonable outcome. So short duration funds typically have a duration range

09:34 of one to three years according to the SEBI guidelines. Now, if you are in the one to

09:40 three year bucket with the flexibility to the fund managers to marginally reduce or

09:45 increase duration in line with the evolving situation and interest rate outlook, it first

09:50 of all doesn't give you too much of a high volatility exposure because the duration is

09:55 capped at three years and then it does not completely take you out from the participation

10:01 in the market rally because the minimum duration is one year and then typically the interest

10:08 rate cycles are between two to three years. Therefore, if you invest in a short duration

10:12 fund with an investment horizon of let's say two to three years, you are likely to spend

10:17 a complete interest rate cycle, which means the volatility will maybe affect the enemies

10:24 negatively for a brief while, but then it will even out over a period of three years.

10:29 So I believe given the current situation where there is a very high level of uncertainty,

10:35 we are going through an unprecedented kind of situation which most of us have not faced

10:40 in our lifetime. This category does fit into addressing some of the concerns that this

10:46 situation provides.

10:49 So you mean to say that everybody should play but in moderation to themselves, right? Too

10:53 risky and you burn your hands, too cold and you lose an opportunity. So from risk to safety,

10:59 Mr. Raju, from a relative safety perspective, are banking and PSU debt fund a good option

11:06 given that they have high allocation and triple A rated instruments?

11:11 Yes, because in India, there are banks which are typically tightly controlled and regulated

11:18 by the Reserve Bank. So once in a while, we may have some disruption in the banking segment,

11:25 but by and large, if you look at the history of India, because of the huge involvement

11:31 and oversight by the Reserve Bank, banks have been a safe investment. And again, the public

11:37 sector units by definition are owned by the Government of India. So they are kind of a

11:41 shadow Government of India risk, even though there is no explicit guarantee, but there

11:46 is a owner who is able to inject fresh capital as we have repeatedly seen in case of the

11:52 banking sector, in case of lot of public sector. Therefore, I mean, last example is IFCI, where

11:59 there was a very difficult situation, but all the bonds were owned by the Government

12:02 of India. So I think banking and PSU from a credit perspective, which has been, by the

12:09 way, the biggest challenge in the last three years. If one has been tracking the debt fund

12:14 industry, the last three years have been the most challenging from a credit perspective

12:21 with a series of defaults. And some funds have had a very tough situation to deal with.

12:28 So and again, we repeatedly talk about the current uncertainty, given the once in a lifetime,

12:35 hopefully once in a lifetime experience that we're going through. And therefore, it is

12:40 utmost important that people do ensure to eliminate the risk of defaults to the extent

12:48 possible. From that count, the banking PSU as a category is amongst the safest one. But

12:55 then there is a little catch, which the investors should appreciate that within the banking

13:01 PSU category also, there is a discretion of 20% to the fund managers where they can invest

13:06 in what they want or what they like. So when one looks at the category, one also needs

13:12 to analyze the individual portfolio and see where the 20% is invested. And within the

13:19 80%, again, there is a whole range of banks from AAA rated banks to A rated banks. There

13:27 are public sector banks, there are private sector banks within the public sector undertakings

13:33 also there are a range of options. So just to give you one example, how things can be

13:41 different. So you have HPCL and you have BPCL. Now, government is actively considering divestment

13:46 in BPCL. So after let's say six months or one year, it may not remain PSU. So one has

13:52 to also look at the possible volatility that can come in because of some of these factors.

13:58 Air India, for example, is today a public sector undertaking one year or two years down

14:02 the line, it may not be and then fund managers may be forced to sell some or liquidate some

14:10 of those papers. So as a category, I think it's a very good category. It also has a

14:16 flexibility in built for the fund managers to express their interest rate view. I think

14:21 it's a beautiful category. But again, investors should also drill down into the individual

14:28 portfolios and also make sure that two things, one is that the risk profile of the banking

14:34 and PSU category matches their risk profile. That is very important. And then the sub component

14:42 of that, which is the individual portfolio in which they're going to invest also meets

14:46 with the overall criteria that they fix for investing in this category.

14:52 And how do we become the next Mr. Mahendra Jha of our industry?

14:57 Well, I think I love the challenge of the market uncertainty because even as I am talking

15:04 to you, I may look like a fool in five minutes if the markets or some new developments happen.

15:11 So I think the one is the challenge of dealing with unpredictability. And then second is

15:16 that you get involved in managing other people's money and I think it's a huge responsibility.

15:23 So it also gives an element of how do you put it but for the lack of a proper word,

15:30 some amount of social servicing or involvement. I think there are these two big kickers in

15:38 the current job that I have.

15:39 So the popular notion in your industry, if I could say is that the corporate bond fund

15:46 category has a potential for better risk adjusted returns compared to other debt fund categories

15:51 and traditional fixed income. Do you believe in this notion? And if not, why? And if yes,

15:58 why?

15:59 Okay, I mean, objectively looking at it, I don't think that we can pitch one product

16:06 against another because they serve the different types of needs of investors. It's like saying

16:12 that whether the large cap funds are better than the small cap funds or whether X, I think

16:19 that's not the correct way to look at it. But yes, on a risk adjusted basis, I think

16:26 the corporate bonds do have the potential to provide higher return over longer term

16:33 simply because they can carry higher duration. And then the corporate bond funds, again,

16:38 one beautiful feature about the corporate bond funds is that at least 80% of the exposure

16:45 has to be in AA plus or better rated security. So there is an inbuilt component of credit

16:52 improvement. And as I said, the only risk that an investor has in investing in a debt

16:57 fund is a great risk because if you meet with one credit accident, that can set you back

17:02 by a long period, maybe years. Therefore, I think with the inbuilt feature of higher

17:10 credit quality, ability to invest for longer duration, ability to actively manage interest

17:16 rates, I think it's a product which has a good potential. But again, I come back to

17:22 this point every time that ultimately the investor has to see what matches his risk

17:27 appetite or his risk profile that is very important if most of the confusion or most

17:34 of the hostility if I can use that word I don't know again, I'm not very good at it

17:41 towards the debt fund is because of lack of appreciating these factors, no debt fund is

17:47 good or bad. It is a relative term in relation to what the investor is expecting. So most

17:53 of the time the expectations are set incorrectly and that causes a lot of pain even to the

17:59 investors who are otherwise investing in good funds. So I cannot get tired ever saying this

18:05 again and again, investors need to assess their own risk appetite and then match it

18:10 with the appropriate funds. But yes, corporate bond funds are a very good category for investors

18:16 with long term investment horizon to get very good and exciting returns.

18:22 Mr. Chaudhary, the biggest question I fall is investors largely look for both returns

18:27 and liquidity in their portfolios and I mean, why shouldn't they? So which products from

18:33 the Mirai Asset Mutual Funds table meet this criteria?

18:36 See, this is an investor education program. So I don't want to talk about Mirai Asset

18:42 in particular, we have the discussion at another time. But as a general response to the category

18:48 of debt funds, I think the liquidity in every single debt fund is of the highest order.

18:55 So when the investors come into the debt funds, I think the liquidity should be the last thing

19:01 of their mind because they can just sign a redemption slip and then they can get their

19:05 money next day into the bank account. There are a few funds which might have a lock-in

19:10 period. So again, the lock-in period only means a little bit of an exit load or a redemption

19:17 penalty, but it doesn't stop them from getting the money back. There is no other debt product

19:24 which provides this kind of a liquidity. And technically, again, you can get that same

19:32 kind of liquidity in fixed deposits. But in case of fixed deposits, if you redeem early,

19:37 your interest rate is reset to the actual period for which you have invested. Whereas

19:41 in case of debt fund, the penalty that you pay is fixed. So there is a huge difference

19:46 in what kind of penalty you pay for early redemption of IP versus, and then there is

19:51 a huge taxation difference. So most of the time, if the investor has a state for more

19:55 than three years, then I think he saves enough on tax for the exit load that he pays. So

20:03 just to address the first part, I think the liquidity is not often concerned to an investor

20:11 in a debt fund because he can redeem any single day by just signing a redemption slip and

20:18 submitting it to the MC. Now comes the second part of the return. Now, it is my belief,

20:25 and a lot of people will challenge me on that and they will say, "Gurmeet, data, etc."

20:29 I think there is a 25-year history of the mutual funds. I firmly believe that the debt

20:34 funds are one of the best options for the investors in terms of the return history.

20:42 We don't know obviously what will happen in future, but debt funds, I think if one

20:47 chooses the right product, beats other categories or other options, hands down, and I think

20:53 there is enough history which people can search. Now, and we don't want to obviously highlight

20:59 the return part too much because the primary objective is not only the return but matching

21:06 the risk profile with the risk profile of the product. But I think again, return is

21:10 not a concern. In fact, I always say this and I started with saying this, there is no

21:16 free lunch. And therefore, debt funds offer volatility, they offer returns in the medium

21:24 to long term, once the volatility begins to fade out of the returns over a longer period

21:31 of time. And what happens is that the investors do not match their investment horizon with

21:40 the product's investment horizon and that is where the problem comes. Otherwise, return

21:46 wise, because there is no free lunch, investors have to accept volatility, but there is no

21:53 one who will take a risk without a corresponding return. And therefore, the other side of the

21:59 commitment has also to be delivered. And I think the debt funds have delivered in the

22:03 past. We talked about the fact that there is no free lunch, but at the same time, there

22:10 is no commitment that can be given without the risk being rewarded. And therefore, I

22:15 think the debt fund have to also deliver in terms of return over a longer period of time.

22:23 And I think it is a very well established information that the gilt funds, which are

22:30 the simplest form of debt funds, 100% investment in Government of India, no credit risk, absolute

22:38 liquidity, those funds have been amongst the best performer in the debt funds category

22:43 over the last 25 years plus that the industry has been in India. And the returns on those

22:49 funds compares quite favorably not only with the other debt options, but some of the other

22:55 more glamorous, so to say categories like equities. So I think there is enough history

23:01 with us to believe that there is a good return profile that the debt funds offer. Now, how

23:07 do we define the return is then a challenge because there are two observations which I

23:13 have with my long interaction with different sets of and different varieties of people.

23:20 The first comment or feedback that we get is that look, why should I invest in debt

23:26 fund, I'm just getting 1%, 1.5%, 2% extra, that is nothing. Now, that is, I think not

23:31 the correct way to look at it. So let me just give you a small example, that if you invest

23:37 one crore for 10 years, and if you get 1% extra, then you get 1 lakh rupees per year

23:45 extra, which means you get 10 lakh rupees over 10 year extra. Now, 10% is suddenly 10%

23:51 of extra return on your original investment. If you assume a normal investor who has an

23:56 investment lifecycle of 30 years, for 30 years, you make 30 lakhs rupees extra just by earning

24:03 1%. So what looks a very small amount over a small period of time, if you look at the

24:09 full investment lifecycle of the investor, it is 30% more without even considering the

24:16 impact of the compounding that may happen over this period of time without even considering

24:21 the tax saving which you will have because of the long term capital gain taxation on

24:26 the debt fund return. So that is an argument which is simply without applying any analysis.

24:35 So that 1% means a lot over a long period of time. So there is a good reason to even

24:40 go for that 1% extra return or 1.5% extra return which most debt funds are given over

24:48 the corresponding products over a long period of time. And then secondly, people say, look,

24:55 why should I invest in debt? Equity can give me 20% return, gold can give me 15% return,

25:02 property I have made so much money. Look, absolutely fine. So when you go to debt funds,

25:12 you have to look at the category, the benchmark return and the competitive products return

25:18 with the same profile. So let's assume that equity gives higher return than debt. So anyone

25:26 can afford to take that risk, he should go 100% for equity funds. So again, there is

25:31 a misplaced notion, because if the moment you start talking about investing, and you

25:40 look at it from an investor's perspective, there's a very simple concept, but very fundamental

25:45 concept of asset allocation. Now, everybody can invest 100% of their money in equities,

25:53 but then look at what happened in March last year. So there is that volatility also, therefore,

25:58 obviously, you cannot put everything in one basket, and then be subject to the volatility

26:05 in that segment, which is why if you then look at the combination of the asset allocation

26:12 and the marginally higher return that the debt funds might offer over a long period

26:18 of time, it can mean a meaningful difference to one's ultimate wealth. And therefore, I

26:25 think, either on the account of return, or on account of liquidity, I think debt funds

26:31 score very, very favorably.

26:34 So how are you preparing your debt portfolios from the impact of stringent localized lockdowns,

26:40 and a massive second wave of infection?

26:44 Again, I will like to generalize this question, then focus on our portfolio, because I think

26:51 the lockdowns, etc, is not a big challenge now to handle, because the challenge always,

26:57 when we are dealing with markets is to deal with uncertainty. So today, my challenge is

27:02 not so much to deal with this lockdown situation today, because now the lockdowns here, my

27:07 challenge is now to anticipate when the lockdowns will be lifted, how long they will last when

27:14 the lockdowns are lifted, what happens to the market. So I think, what I'm essentially

27:19 trying to say is that the investment world is not about living in the past or present,

27:26 but in future, if I am not already living in July or August of 21, then I am not going

27:32 to be a successful fund manager. So what everyone knows, for sure, is not, it's a dead information

27:39 for the fund manager. So my mind, I spent all my day anticipating what next, how this

27:46 wave is going to behave next, will it flatten, will it get worse, will it cause very serious

27:55 damage to the growth recovery prospect, in different scenarios that might pan out, how

28:02 the RBI is likely to react, because they're the big boss of the fixed income market. And

28:06 you know, the lot of direction that we get is the guidance that comes from the Reserve

28:11 Bank. So how to anticipate what RBI may do or how they may respond to the situation.

28:18 So a little bit divergent, but I think at this point, our belief is that the lockdowns

28:25 will be very targeted. I mean, there is a lot of learning that we have had from the

28:30 last year. So this year, the lockdowns are very targeted to restrict individual mobility,

28:36 rather than cripple the industrial sector. So that I think is the positive part. Second

28:42 is I think it is perhaps being too optimistic. But I think if you look at the last two days,

28:48 for the first time, the seven-day average case count has begun to come down slightly

28:54 lower, but it is lower than the previous days. But the most important part, and that, that

28:59 I think is something very important to keep in mind that we had a very huge surge in the

29:05 number of cases. And then now we are about two and a half weeks away from that. So like

29:11 what we are seeing in Maharashtra now, what we're seeing in Bombay now, that the recoveries

29:16 are more than the cases because now you are lagging with two weeks and therefore the patients

29:21 are getting discharged. So if the new cases begin to slow down, then suddenly we will

29:26 see huge recoveries and then the comfort level or the confidence level will improve. And

29:33 that will maybe give us a little bit wider handle in terms of unlocking the economy and

29:38 starting the normal activity. So I am moving with a very positive outlook at this point

29:45 in time, which means that if the economic growth recovery prospects improve, if the

29:51 concern levels and the tension levels with the COVID situation begin to improve, then

29:59 it will give a positive spin to the revenue collection target and the fiscal deficit target

30:05 that will be positive for the fixed income markets.

30:08 That was absolutely fantastic. Thank you so very much for your time, Mr. Jaju. And those

30:14 insights absolutely brilliant. Thank you so very much, sir.

30:18 Thank you so much for inviting me today. And thank you very much for your excellent

30:22 interview. Thank you.

30:23 Thank you, sir. And ladies and gentlemen, thank you for watching. With that, we come

30:27 to the end of the third session in our Investor Education Series. We'll be back soon with

30:33 our fourth. Not to worry, keep following to learn more. Until next time, stay safe, stay

30:38 strong and have a great day.

30:39 Thank you.

30:56 [BLANK_AUDIO]

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