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Nervousness in the market shouldn’t be a problem for investors, says Mahendra Jajoo


Most investors are glued to the happenings in the stock market. However, the bond market is also going through a similar phase. There is a lot of nervousness about the future all around. Shivani Bazaz of ETMutualFunds.com reached out to Mahendra Jajoo, Head-fixed income, Mirae Asset India , to find out his view on the market and its future course action. “The market is a little nervous, many people are expecting rates to go up, and some are expecting policy reversal. I think there is nervousness, but that shouldn’t be a problem for investors. One thing the investors should be wary about is risky credits. That is one factor that even the RBI can’t control. So, avoid aggressive credit risk in your portfolio,” says Jajoo. Edited interview.

The RBI Policy is around the corner. What can debt mutual fund investors expect from the policy?

My view is that RBI will maintain a status quo in terms of rates. I also think that RBI will give out a positive statement maintaining an accommodative stance. It should also say that it will act as and when necessary. The inflation is still very high and RBI has cut rates aggressively. As I look at it, RBI had a two-part plan to deal with the covid situation. Six months ago, we had no idea how damaging the covid situation will be, that was the first part of the problem. The lockdown led to financial markets being in a tense phase. If with a slow economy, we had a dislocated financial market, the problem would have been much bigger. So, globally central banks stepped in to deal with the situation. In the last policy, the crux was that the part-1 has been dealt with positively and due to which the markets are in a better place. The borrowing has been done successfully without any pressure on the market etc.

In part-2, the RBI has to focus on macro-economic indicators like inflation. Therefore, right now I believe that the RBI will focus on keeping the interest rates stable and make sure that we are able to maintain the interest rates in a narrow band. Economy is in a contraction mode and you have to support the markets whenever needed. So, I believe that the RBI will intervene whenever the sentiment goes haywire. So, I believe that no rate cut but strong commitment to help the markets.

Do you think RBI can reverse the easy money policy at this juncture, especially when the whole world is awash with money? It seems, the money market is nervous about it.

My view is that RBI will try to keep the rates very low, but if the environment turns so negative that they have to take action, they will. I don’t think RBI will fight reality. Whether or not the change is stance is possible, I think global environments will tell. India will be impacted by what happens in the international markets. If things go that way globally, then I believe we will have to walk the same line. Right now that is not the case. The international scenario is favourable, so RBI has the room to keep cutting rates. The current scenario calls for keeping the rates low, so I think reversing the policy stance won’t happen in the near future.

The recent volatility in yields in the debt market has given a scare to debt mutual fund investors. What would you like to tell them?

I have said this time and again, returns will come with volatility. Debt mutual funds are less risky, but there is a fair share of volatility involved in debt investment. Volatility will be there. We are at a much better place in terms of the Covid situation. At this point when the inflation is close to 7% and fiscal deficit is of such high order, some amount of volatility is expected. This volatility should not worry investors as long as you have a horizon to sit through a complete interest rate cycle. If you have such a horizon, you will definitely get good returns. Obviously, there are factors that are driving this volatility. The market is a little nervous, many people are expecting rates to go up, and some are expecting policy reversal. I think there is nervousness, but that shouldn’t be a problem for investors. One thing the investors should be wary about is risky credits. That is one factor that even the RBI can’t control. So, avoid aggressive credit risk in your portfolio.

What is your forecast for the rest of the year and the rest of the financial year? Where do you see 10-year yield?

The 10-year yield will possibly go up around 25 bps. By the end of this year I see the 10-year yield to be around 6.15%. The environment is challenging. If the inflation does come down to, say, 4%, the RBI will not cut rates. I believe that the 10-year will gradually inch up from here.

Should regular mutual fund investors stick to short-term debt funds? Or should they be adventurous and bet on medium and long-term debt funds?

I don’t think it is a time to be adventurous at all. If you are an investor who has a long investment horizon, you can bet on the duration funds and stay invested for on full rate cycle. There will be volatility in the near term, but you will get returns. But if you want to take advantage and time the market, then it is going to be risky. If you can’t stomach volatility in the near term, it would be better to be in the short-duration space.

Many debt mutual fund investors continue to be nervous about the conditions in the bond market due to the Covid-19 pandemic. Do you think downgrades, likely defaults, liquidity scare, etcetera are behind us?

Investors need to understand that most of the credit problems started even before the pandemic hit the market. So, Covid-19 has got not much to do with it. Credit risk is a constant in the debt market. You can try and avoid it. The weaker companies suffer the most and they suffer the first blow. That’s why I believe that avoiding aggressive credit is very important. As the moratorium has ended, there might be some credit issues.

What is your advice to debt mutual fund investors?

The big challenge in front of the government and the regulators is the economy. Hence, the RBI will do everything to make the recovery robust. So, I believe that it will do everything to keep interest rates lower. My advice is allocate money based on your investment horizon. Keep your risk appetite in mind and stay away from risky credit.





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