Outlook Money’s session on Demystifying the Corporate Bond Funds in association with Mirae Asset

OutlookIndia

Learn everything you need to know on how to create wealth investing with corporate bonds. The session includes a comprehensive overview of corporate bond investing, who should invest, what are the benefits and features of corporate bond funds and their limitations. If you are a corporate bond investing beginner or have bought corporate bonds in the past, this is for you!   Watch Mr. Mahendra Kumar Jajoo, CIO, Fixed Income, Mirae Asset Investments Managers ( India) Pvt Ltd in conversation with Outlook Money’s Vishav.  #Money #OutlookMoney #OutlookMagazine #OutlookGroup

Transcript

00:00 Hello everyone and welcome to today's Outlook Monies webinar in association with Mirai Asset

00:10 Investment Managers on demystifying the corporate bond funds.

00:15 As we know for the month of January 2021, the corporate bond category under the debt

00:19 mutual funds garnered a net inflow of over Rs. 5400 crores.

00:23 Furthermore, the asset under management of the corporate bond funds has doubled from

00:27 around Rs. 81,000 crore in January 2020 to over Rs. 1,64,000 crore in January 2021, a

00:34 massive growth of 101%.

00:36 Today, the corporate bond category provides a safe investment option given the limited

00:40 scope to take credit bets as 80% of their assets are in the highest rated corporate

00:45 bonds.

00:46 Talking on the subject today, we have with us Mr. Mahendra Jaju, who is the CIO of Fixed

00:50 Income at Mirai Asset Investment Managers.

00:53 Mr. Jaju has over 25 years of experience in the field of financial services, including

00:57 fixed income funds management.

00:59 Further, he has a central role in supervising all debt schemes of the Mirai Asset Mutual

01:04 Fund.

01:05 Mr. Jaju, a very warm welcome to you.

01:06 We are looking forward to talking to you about this issue today.

01:09 Thank you so much for inviting me.

01:13 Yes, you're welcome.

01:15 So my first question to you, Mr. Jaju is for the benefit of our viewers.

01:20 How do you explain a corporate bond debt fund to a layman investor?

01:24 Well, as you know, there are different varieties of different types of mutual funds.

01:33 Corporate bond fund is one amongst many.

01:36 In the case of the corporate bond fund, at least 80% of the funds AUM has to be invested

01:42 in corporate bonds rated EE+ or higher, which means a very high safety situation because

01:49 the EE+ corporate bonds default history in India is extremely and the remaining 20% is

01:57 at the discretion of the fund manager in order to manage liquidity and other risk parameters

02:03 as per the current SEBI guideline.

02:06 All these funds have to maintain at least 10% in liquid assets, which are defined as

02:10 treasury bills, credits or the government securities.

02:13 So you see that 90% of the fund is invested in very high credit quality instruments.

02:20 And then the fund manager has the discretion to decide what maturity of the funding maintenance.

02:26 So the fund structure also allows for the feasibility to manage the interest rate risk

02:32 in a dynamic manner.

02:33 So this combination, I believe is a very good feature, which offers a good option for the

02:40 investor.

02:41 Right, like you said, there are investments in kind of top rated corporate bonds, so that

02:50 they are relatively safer compared to other kinds of investments.

02:54 But can you tell us what are some of the other prominent features and benefits of investing

02:57 in these kinds of funds, corporate bond funds?

03:01 See, the Indian debt markets are still evolving and the investors are gradually understanding

03:11 the benefit of investing in the debt mutual funds.

03:14 Now in debt mutual funds, you have the gilt funds and then you have the short term fund,

03:20 which can invest in a duration range of one to three years, then you have the dynamic

03:24 bond fund, which can have a variable duration structure.

03:29 So in this number of options that the investor has, the corporate bond fund is the one where

03:36 first of all the quality of the portfolio is generally comprised of high credit quality

03:42 instruments.

03:43 So as we know that in the past, there have been so many instances where because of a

03:48 credit related issue, the investors had a disappointment.

03:52 So that aspect is taken care of because when the investors are looking for a debt fund,

03:58 they generally look for a safe option.

04:01 They do not want to take too much credit risk and in that criteria, these funds fit well.

04:09 As I also said that under the new saving requirements, all of these funds have to maintain at least

04:15 10% in liquid assets, which are generally defined as either TREFs or T-bill or a government

04:25 bond.

04:26 So even when there is a high amount of volatility in the market or when the market liquidity

04:31 is tight, because of this new added feature, these funds will be able to offer a reasonable

04:37 liquidity provision for the investors.

04:40 Also because the fund is largely invested in AAA and AA+ kind of corporate papers, which

04:46 also includes the public sector bonds, the liquidity and the safety feature of the fund

04:52 is generally on the higher side.

04:54 So this is a typical combination that the investors look at.

04:58 Now the fund, as I mentioned, has a flexible situation insofar as the average maturity

05:05 is concerned.

05:06 Therefore, if the fund manager wants to be proactively managing, they can also provide

05:12 some vote of a cushion against interest rate volatility because when the interest rates

05:17 tend to go up, they can bring down the duration and vice versa when the interest rates are

05:22 going down, they can increase the duration.

05:24 So therefore, they can also allow decent participation in a market performance at the same time providing

05:31 a reasonable downside protection.

05:33 So this fund provides a fair amount of safety and a good performance range.

05:41 So to that extent, I think it is a very attractive proposition for the investor.

05:47 And as you mentioned, there have been some credit issues when it comes to the debt mutual

05:52 fund space, which has led many investors to shy away from investing in debt funds.

05:57 So how should an investor evaluate the risk while investing in a corporate bond fund?

06:02 Well, to start with, I think the investors have generally been pretty attracted towards

06:10 the debt mutual funds.

06:11 As you mentioned that the AUM of the corporate bond fund category has doubled in the last

06:16 one year itself and in the last one year, we saw a number of incidents, there were COVID

06:24 related disruptions, there was a time when there was a high fear of defaults and delays

06:31 in the NBFC segment.

06:32 There were times when some of the industry related issues in credit funds we saw.

06:39 During all these times, the corporate bond fund found the attention of the investor.

06:44 And therefore, I think the investors understand that there can be periodic episodes of volatility

06:51 or some other incidents, but by and large, the debt mutual funds have been a very good

06:57 alternative to the conventional fixed income options.

07:02 Corporate bond funds in particular, because of the restrictions on investing only in highly

07:08 rated papers have always found a good space in the investor's portfolio because investors

07:16 have repeatedly been disappointed with the credit related events.

07:22 And therefore, this has been the fund which has found a lot of attention in the last one

07:29 year.

07:30 Right.

07:31 As we know, the budget has been laid out, the COVID crisis is behind us, almost behind

07:38 us, the vaccine is already being rolled out.

07:41 So a lot of people want to know what is the outlook for debt mutual funds, especially

07:46 the corporate bond funds for the next, the rest of the year, we can say 2021.

07:50 So how would you say it looks like going in future?

07:58 So in our assessment, the fiscal deficit for the year FY 2022 is at 6.8% of the GDP and

08:09 the gross borrowing amount in absolute terms is around 12 lakh crores, which is on the

08:14 higher side.

08:15 On top of that, the economy is expected to grow at about 10.5% as per the reserve bank's

08:22 last monetary policy projections.

08:24 The budget has shown a GDP nominal growth rate of about 14.4%, which means that if the

08:31 economy is going to grow at this pace, then the corporate sector borrowing requirements

08:37 will also increase.

08:38 So therefore, on one hand, you have a large government borrowing program, on the other

08:42 hand, there is likely to be a pickup in the credit demand of the corporate sector.

08:46 So there is likely to be some crowding out of the private sector borrowing requirement,

08:51 which might mean that bond rates may go up and within that the corporate spreads may

08:55 widen and that is happening at a time when the large good quality companies may be borrowing.

09:03 So you are going to either be worrying about the fact that the interest rates are going

09:08 up, but then interest rates are cyclical in nature, they will come back down when the

09:13 environment improves.

09:14 But in the current year, there is a possibility that one may be able to invest into high quality

09:19 companies at very attractive spreads and that in my view is an opportunity that will come

09:25 during the current year.

09:27 So investors need to focus on the opportunity that is likely to be available rather than

09:33 worry too much about the short term impact of what happens if the interest rates go up

09:37 and whether my NL will get affected or not.

09:41 In our view, if the investors remain invested for one full interest rate cycle, then they

09:47 are going to end up with a happy experience of investing in debt mutual funds.

09:52 It is important to remind once again that most of the time it is the credit related

09:58 incident that have a more lasting impact on the NL rather than the interest rate volatility.

10:03 So I believe that this will be a year to create a good portfolio of high quality companies

10:08 at attractive interest rates.

10:11 Right, right.

10:12 Thank you.

10:13 Thank you so much.

10:14 Now, you know, the budget was recently laid out in which the finance minister hinted that

10:19 the retail investors can invest in G-Secs or government securities.

10:22 Do you think that this will change the landscape of overall debt mutual fund investment?

10:27 And what this means for a layman, you know, debt mutual fund investor?

10:32 So for the debt mutual fund investor, this doesn't change anything because if the investors

10:39 are able to participate directly into the gilt market, it will typically replace the

10:45 tax free bond and the small savings investors, they can also approach the gilt directly through

10:52 the reserve.

10:53 But as far as the debt mutual fund investors are concerned, they come to a product which

10:58 keeps the market relatively return, which gives them the tax advantage of long term

11:04 capital gain if they remain invested for a long term.

11:07 They get the advantage of the experience and skills of the fund manager in terms of dealing

11:14 with the interest rate volatility.

11:18 Credit risk is not an issue because in gilt, they are the highest and most safe instrument.

11:24 So I think the target for the retail gilt and the target for the debt mutual fund are

11:33 two different sets of investors.

11:35 There could be some overlap because some debt mutual fund investors may also look at the

11:39 gilt.

11:40 The other part is that the gilt direct is something which is just about starting and

11:45 we have to see how it shapes up.

11:48 But my first sense is that it will be more a replacement option for or alternate option

11:54 for people who invest directly into the tax free bonds, which are now generally not available

11:59 in good volume and for people whose small savings limits have been exhausted.

12:08 Thank you so much, Mr. Raju.

12:09 That was a great and insightful conversation that we had with you.

12:14 I hope our viewers would have had an understanding of how corporate bond funds work and how they

12:20 should approach corporate bond funds after watching this episode.

12:23 We will be back with another episode soon.

12:25 Till then, goodbye.

12:26 Thank you.

12:27 Thank you.

12:28 Thank you.

12:29 Thank you.

12:42 [BLANK_AUDIO]

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