Mr. Prashant Pimple
Senior Fund Manager – Fixed Income
Prashant Pimple, Senior Fund Manager Fixed Income has been managing various debt funds since 2004. He has total of almost 12 years experience with Reliance Mutual fund managing duration, credit and balanced schemes. In his working career with Reliance Mutual Fund for last 12 years he has been instrumental and responsible for managing various category of funds successfully which has resulted in consistent and better performance of these schemes over the years. Over the years his experience and performance has resulted in confidence of investors in various schemes managed by him leading to some of the largest in its category fund AuMs. Prashant Pimple has been in Indian fixed income markets since 2000 having a rich and varied experience in Bank and Mutual Fund treasuries for last 17 years.
Q: Investors always debt and equity markets through different lens. Does the performance of /returns from these two markets have a correlation? Please explain the relationship between them to our investors.
Answer: Investors should look at debt and equity markets through different lens as their fundamentals are different and there is some correlation in performance of these asset classes. Debt markets are guided by interest rates, currency and macroeconomic indicators while equity markets are a function of earnings followed by macroeconomic indicators.
It can be said that high interest rates are detrimental to equity markets but it is not the only factor as interest rates cut would lead to improvement in margins for companies in the coming quarters but not immediately. The variables for equity markets are vastly different from debt as they depend on government reforms, economic growth, macroeconomic indicators, global growth, FII flows etc.
Q: Government has been steadily decreasing the interest rates on small savings. At what levels do you see these interest rates to stabilise in next few years, say 3 years? How and will this fall in interest rates impact returns from debt funds?
Answer: Small savings rates have been quite high compared to the yields in the debt markets and government by linking them to the market are creating a level playing ground. These rates are linked to market movements of GSecs and will be reviewed in a quarterly basis. These rates don’t have an impact on debt funds returns as small savings scheme have a buy and hold strategy for the long term and generally they invest in medium to longer term papers. RBI has cut interest rates by 175bps in the past two years and rates now may remain on hold for coming quarters as further rate cuts would be data dependent. Rates are expected to stabilize at these levels and trade in a range. Debt mutual fund assets are to the tune of Rs12 lakh crores and long term papers may account for less than 10% of the overall debt AUM.
Q: Post demonetisation we saw banks floded with excess liquidity. How did it impact the markets and what is current situation / strategy adopted to manage the same?
Answer: Post Demonetization, excess liquidity coming into the banking system brought down the rates across the curve by 30-50bps and since then remonetisation has picked up pace. Currently excess liquidity in the system stands at around Rs 2-2.5 lakh crores and RBI has been sucking out the excess liquidity through CMB and variable reverse repo.
Q: The GST implementation is just round the corner. How do you feel it will impact inflation and interest rates in the short to medium term?
Answer: GST is expected to be inflation neutral as most of the essential items are taxed lower than expected and CPI may remain undershoot RBI inflation target by end of the FY18 if the monsoons are normal and crude prices remain subdued. The upside risks however remain in the form of below normal monsoons, any spike in crude prices and impact of 7th Pay commission HRA on housing. RBI MPC will keenly watch the incoming data in coming months to decide the policy rate.
Q: How should debt fund investors position themselves at this point of time for short term to medium term investment horizon. Towards which end should they preferably be on the yield curve?
Answer: Short end of the curve looks attractive in the current scenario because of the steep yield curve and attractive carry it offers. Investors should invest in products based on their investment horizon. For 1-3 years investment horizon, UST, Short term and Accrual funds make immense sense for investors today.
Q: Please share your fund house's investment philosophy with our investors. Also share your duration / investment strategy at this point of time for your funds?
Answer: Though there might be a pro longed pause in RBI’s rate action in the upcoming monetary policies, we feel that it's not an end of low interest rate regime (we do not expect any rate hikes in the foreseeable future) and RBI might relook at its present conservative stance once it gets clear indications on macro parameters and monsoons. Rates will be well anchored because of the Neutral Liquidity stance by the RBI. In line with RBI's current monetary and liquidity stance we reiterate and expect curve to remain steep and accrual strategy to play out well over next couple of quarters. Comfortable liquidity situation, weak credit growth and continuance of stable interest rate scenario would lead to compression of spread between various curves.
The combination of better liquidity conditions, revision of Real Interest Rate Target, continued FPI flows in CY 2017, increased demand for G-Secs from banks and more stable overnight rates will support bond markets going ahead.
We feel Steepener and Roll-Down are the best strategy from medium term market perspective and remain the best defensive strategy to generate stable returns over next 6 to 12 months. The present RBI’s stance on liquidity coupled with the change in monetary policy stance further supports our Steepener view.
In our RMF Funds, in line with our above view, our investment strategy is to build a good portfolio mix of liquid assets (GSecs , AAA PSU Bonds) & semi liquid spread assets (SDLs , AAA Pvt Bonds) so as to maximize gains and generate alpha in the funds.