Credit risk funds are still relevant, says Mahendra Jajoo, CIO – debt, Mirae Asset

Many investors are having second thoughts about their investments in debt mutual funds. Most advisors are asking investors to stay away from most debt mutual fund categories, expect for overnight and liquid funds.

Many investors are having second thoughts about their investments in debt mutual funds. Most advisors are asking investors to stay away from most debt mutual fund categories, expect for overnight and liquid funds. Credit risk funds have witnessed large outflows. What is in store for debt funds? Shivani Bazaz of ETMutualFunds.com spoke to Mahindra Jajoo, CIO- debt, Mirae Asset, to find out what is his take on the scenario. Also, what does he think about the government economic package and RBI’s surprise rate cut. Edited interview.

The government has finally unveiled its economic package to deal with the Covid-19 pandemic. What impact will it have on the debt market?
I think there are two positive things in the economic package: the focus is on holding hands and not doling out money. We expect that when things settle down, the govt has money for more reforms. Secondly, there will not be additional borrowing over and above the package, so I think that is positive for the bond market.

The Reserve Bank of India also surprised the bond market with a 40 basis points rate cut.

RBI had hinted towards the possibility of more rate cuts earlier, but the timing of this rate cut was unexpected. In March, the rate cut was expected as there was a huge sell off in global markets. However, this time the markets were quite stable, so the rate cut came as a surprise. Nevertheless, I think it is a welcome step. This rate cut might also be a follow up of the economic package. The advancement of the meeting without any notice is very surprising.

Do you think the government borrowing is likely to drive up yields in the bond market?

So, the RBI has announced the central borrowing plan. The state government borrowings are conditional. Therefore, one can monitor over time and see what the chances of that are. So, in my sense, the state government borrowing will be a function of how long this medical emergency exists. State governments will borrow more, but as far as the broader interest rate markets are concerned, it will not impact the headline interest rates.

Various relief packages were announced for troubled MSMEs and NBFCs. Will it bring down defaults and have a positive impact on debt mutual funds?

It will help incrementally. Debt mutual funds do not have exposure to MSMEs, but yes NBFCs. The package is just the starting point. NBFCs have been through a lot and this package might not solve all their problems. So, yes, the package will help the sentiment around NBFCs in the market, but on the ground the change will be little. So, debt mutual funds might not get impacted. Confidence will improve when one can see the end of this crisis. Government can help to a certain extent but the pressure on NBFCs is too much at this point.

Mutual fund investors seem to have given up on debt mutual funds after the Franklin Templeton episode. What is your assessment of the scenario?

I don’t think they have given up. The data suggests that in the initial days of the Franklin episode, there was panic. But if you look at the data one month down the line, there were big redemptions only from credit risk funds. That is one category that has faced huge pressure in the last one month. Honestly, I believe that debt mutual funds as a segment are very much in the game. The debt mutual fund schemes are relevant at this point, when the FD rates are going down, equities are failing and so on. There are definitely problems, but that doesn’t mean we write off the entire debt mutual fund segment.

The lesson is that all debt mutual funds are not the same. Gilt funds have given around 10% returns. If there are investors who got hit, there are also investors who earned 9% returns from debt funds. My suggestion is, it is time to use the equity principles in debt. Short term volatility doesn’t mean you will run away. Choose your schemes carefully on the basis of how good and liquid the portfolio is.

Many advisors and financial planners are asking investors to stay away from most debt funds other than safest ones like overnight, liquid, banking & PSU Funds. What is your take on it?

I really think this is short-term. There are investors who have suffered, and this is an uncertain time. Advisors will change their advice according to how the market functions. Events like the Franklin leave investors thinking. So, I believe that your focus should be on the quality of your portfolio. Investors need to differentiate between high and low quality, not run away from debt schemes.

Credit risk funds saw large outflows in April. Do you think it is the end of the road for these funds?

There might be a trust deficit but that is unreasonable. We have to understand that this particular category has managed such huge redemption without defaulting on any. So, yes there is risk in these schemes and investors know it. You invest in a small or a micro cap fund, knowing that they can generate high returns. Now, when the markets see volatility, they take a beating and you know that could happen. Do you stop investing in small cap funds? No. When you invest in a high-risk instrument, you expect high returns and you should be ready to lose money. If the overall macro environment is under pressure, credit risk funds can’t perform. This doesn’t mean credit risk funds are bad. Credit risk funds are not over, they are still relevant. You just need to understand the risk involved.