Invest in funds that suit your risk appetite: Vikrant Mehta, PineBridge Investments

My view on the debt markets...

The policy rates have been reduced by 1% for 2012-13. With growth likely to take precedence in the growth-inflation dynamics, we could see a lowering of repo rate, though in a limited manner, in the future. The wholesale inflation has dropped below 7% and it is likely to remain in the 6-7% range in the near term. However, it is possible that towards the second half of this calendar year, inflation may come close to or breach the upper band of this range. If this happens, the scope for lowering the interest rates may become difficult.

The expectations of higher rate cuts had led to a flat-to-inverse interest rate yield curve. With the debt markets coming to terms with the limited scope for rate cuts, the yield curve is likely to slope upwards.






My portfolio strategy for the coming months...

Given our present expectations regarding the change in the shape of the yield curve, we have the opportunity to employ our yield curve positioning strategies to exploit this market movement. So, in this case, we will try to focus on the shorter end of the yield curve as it may become more attractive because of the dynamics we expect to play out in the debt markets.

My concerns for the debt market...

India is facing a huge challenge in mobilising financial savings, which is exerting pressure on interest rates. The government borrowing programme has a direct impact on interest rates as it crowds out the private sector. It is heartening to see that the net budgeted borrowing this year is more or less in line with last year in absolute terms. If this happens, it will be positive for the markets. However, if the fiscal deficit increases, we may see the markets react negatively. The reason fiscal deficit can go up is if the expected economic growth does not materialise or expenditure rises beyond the budgeted levels, or due to a combination of both.

My advice to investors...

All investors have an allocation in fixed income products (bank and retirement accounts). So, when an investor looks at a mutual fund for a fixed income product, he should primarily consider liquidity. During emergencies, he should be able to withdraw his money and expect a reasonable post-tax return.

We would not advise investors to take market calls as it would be very difficult and futile. Instead, they should invest in funds that suit their risk appetites. For example, if they are comfortable with low risk, they should opt for shorter duration products, and if they can bear high risk, they should allocate money to long-term bond funds.

When we talk about risk, we don't mean credit risk, but the mark-to-market risk. If an investor has equal amounts in a short-term product and a long-term product, and the interest rate goes up, he would suffer higher losses in the long-term product temporarily. If he continues to hold it for a long period, the volatility could be smoothened over time. Therefore, the investor should take a call according to his appetite for enduring short-term volatility, besides considering liquidity and post-tax efficiency.

(As told to Sanket Dhanorkar)