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AMC INSIGHT
A Cruise through the Debt Products & Strategies
- SBI Mutual Fund
06-Jul-17

SBI Mutual Fund completed 30 years of wealth creation. We take you through the Debt Products of the Fund House, the internal strategies and the positioning in the current scenario from the Head- Debt, Mr. Rajeev Radhakrishnan.





MF Live: How do you foresee the Fixed Income Market this year in light of the Seventh Pay commission implemented in states, GST, commodity prices, volatility in G-Secs and inflation with the RBI targeting a 4% inflation on a sustainable basis?


Rajeev: Renewed expectations of monetary easing following recent moderation in CPI & expected softer prints over the coming months have set the stage for market sentiments to remain broadly positive in the near term. In view of the significant undershooting of CPI below RBI estimates and lack of any near term upside risks to CPI, the possibility of an additional policy rate easing of 25 bps cannot be ruled out.


At the same time, there are material risks surrounding the end target of a durable softening of CPI around the 4% anchor. Even as recent inflation data has printed lower than the targeted mid-point, it is difficult to discern the structural/durable elements from the cyclical and one off factors that have contributed in large part to the recent softening. Considering this as well as material uncertainty surrounding factors such as GST, pay commission awards across states (which can provide a material consumption stimulus) as well as state finances, the base case remains for monetary policy stance to remain cautious restricting space for any larger policy accommodation. It must also be understood that even as policy rate has remained on pause since last October, effective monetary conditions have been quite loose with the large positive swing in liquidity and the RBI not resorting to any durable liquidity absorption. This has enabled a much faster policy transmission into lending rates, both market based as well as loans.


The other notable unknown over the coming year would be the market reaction in terms of FPI flows in the context of lesser monetary policy accommodation from global central banks.





MF Live: With interest rates running the downhill, how should advisors foresee the long-term returns from Debt Funds? What is the primary driver for Long term Debt instruments?


Rajeev: Over the last few years, capital gains have been the main contributor to returns from long term debt funds. Given that incrementally the space for larger policy rate cuts is restricted, the contribution of capital gains would be lesser going forward. In a context where rates are expected to largely remain stable, with occasional event driven volatility, reasonable risk adjusted portfolio accrual as well as tactical duration allocation would be the key factors in the coming year.

While the overall returns from debt funds may settle lower, they still provide an attractive investment proposition over traditional fixed income investments. In an environment where long term inflation expectations are expected to settle lower, the volatility surrounding market yields (as well as corresponding volatility in long term debt funds) should move lower providing more stability to investor portfolios.



MF Live: There are various instruments in the Fixed income space. What are the factors influencing each of these and how do you read the yield curve now and moving ahead from here?


Rajeev: Demand supply dynamics specific to each instrument and liquidity are factors impacting specific instruments in the fixed income space. In an environment of bullish market sentiments, we have seen the curve bull flattening as long term spreads as well as spreads on off the run securities tighten. Over a period of time as additional rate cut expectations taper down and with expectation of a comfortable liquidity scenario, the yield curve should remain steeper.





MF Live: What strategy do you suggest for Debt Funds in the current scenario? How should advisors strategize Debt Investments for their clients- from Short-Term to Long-Term perspective?


Rajeev: Investment in various debt funds should reflect the specific risk tolerance and time horizon of the investors.

Short to medium term debt funds can be a good investment category irrespective of the rate cycle as a core allocation in a fixed income portfolio.

More specific to the current context, medium term funds with a core allocation to short term non AAA bonds , ( largely in the AA segment ) and provision to tactically alter duration exposure through Gilts/ AAA bonds within specified duration limits can be considered for incremental debt allocations. Investors with higher appetite for credit and liquidity risk can consider investment in accrual oriented credit products.



MF Live: Within the Debt Funds, we look at the Corporate Bond category. What is the process at SBI for investments in Corporate Bonds? Is there more reliance on the ratings from external agencies or SBI has an in-house process? Also, is there any sector bias in the selection of these instruments?


Rajeev: Corporate Bond fund relies on a bottom up credit selection approach. We follow an internal credit selection approach for all credit selection which focuses on the 4 C‘s of credit, i.e. Capacity, Covenant, Collateral and Character. All debt proposals are analysed by a 4 member credit team, who have sectoral responsibilities. Certain minimum financial criteria as per the Investment Policy are prescribed as investment norms for companies to be eligible for investment.


Proposals are discussed at team level, and if the same are found worthy, they are forwarded to Investment Committee for their comments and approval. The IC consists of MD, Deputy MD, CIO, CRO. Companies are classified into tiers as per the internal assessment, without any dependence on credit rating given by external credit rating agencies.


While sectoral trends are analysed for each company, sectoral biases are absent, as it is believed that good companies may be present even in bad sectors, and bad companies may exist even in good sectors. Hence credit analysis is on the merits of each case.



MF Live: The ETF market is picking up slowly in India. What is your debate on investments in passive fund like SBI-ETF 10 year Gilt Fund and an active fund- SBI Magnum Gilt Fund (Short term & long term)?


Rajeev: Debt oriented ETF’s haven’t yet picked up in India. As regards Gilt schemes, investors have continued to prefer either direct Gsec exposures or allocation through open ended actively managed Long term Gilt schemes. Currently the ETF space remains untapped in the debt category.


The allocation to duration schemes have largely been through open ended income and dynamic schemes where the investment flexibility allows allocation to Gilts, Bonds as well as Money Market securities.





MF Live: Please take us through the product basket of Debt at SBI. How are various Debt products of SBI Structured? (The portfolio strategies and the investment argument now for each of them?)


Rajeev: The product framework is as below.





Risk & Return Matrix



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