Mr. Devendra Nevgi, Fund Manager and Head - Fixed Income, has 12 years of experience in managing fixed income products in domestic and global markets. A graduate of commerce from Mumbai University, he is a qualified Chartered Accountant.
In a candid interview with Personalfn, Mr. Nevgi gave his take on interest rates and inflation. At the end, he had some useful advice for investors who are looking at investing in debt funds at this point in time.
Pfn: What is your view on interest rates?
Mr. Nevgi: I feel that over the short-term, interest rates are likely to tighten from current levels. Basically what is more important for interest rates now is the global situation and the global circuit band including US, UK and Japan showing a tightening bias. Hence it is very important that Indian circuit band stays ahead of the curve and not behind the curve.
I think by July, we can expect 25 basis point hike in the Reserve Repo rate. Thus the whole idea of RBI is to contain the inflationary pressure. They will see to it that the interest rate remains on the higher side and contains credit growth. Credit growth has been very sharp over the last year; growth was more than 30% last year and the target is to get it back to 20-22%. The credit-deposit ratio is still around 69-70% i.e., any excessive credit demand has to be funded by fresh deposit growth; so actually interest rate are likely to move up.
Pfn: What is your view on inflation?
Mr. Nevgi: Apart from the control of the administered inflation, the nominal inflation should be high from here. The second round of crude pass through has been very limited and I think that India will have to increase petro cash limit very shortly as they can’t remain at this level. So I think inflation should probably be in the range of 5-5.5% over the next six months. But if crude prices rally further, then it would be a tough call on inflation. In such a scenario it would be at the higher end of 5.5%.
Also commodities prices are going up, so the pass through of these things is really high. I don’t see inflation coming down beneath 5-5.5%. This is precisely where the RBI is keen on containing inflationary pressure. Moreover, unfortunately the GDP growth rate is moving away from manufacturing to the services sector, which contributes 50-55% of GDP. That is not reflected in the inflation because the composition has not changed. It is a global practice to change the composition, but in India the composition doesn’t change frequently. So it’s not an accurate reflection of inflation. And of course, there are administered prices keeping it down, but if you readjust it to the current price level, then over time, these prices will align to the global prices. Asset price inflation is also going up, though not reflected in the economy. All these factors are very important.
Pfn: What should investors look at while investing in debt funds?
Mr. Nevgi: In a debt fund we should look at the history of the fund, the fund house and the fund management team (i.e. how well-experienced is the team in managing debt funds). It is important for the investor to evaluate fund houses and fund managers on these points. There are a lot of (debt) funds that actually take on higher risk, so it is important for investors to know whether the fund houses are ethical and also risk-averse in terms of generating returns. It is equally important for the investor to see, depending on his view, where interest rates are headed and how different is his asset allocation.
The investor has to understand this very clearly because in India unfortunately, fixed income investors have lower participation in fixed income funds. Globally, the fixed income segment is much higher than equity markets, but in India it is the other way round. I think every investor has to have his asset allocation in place. Then there are other aspects such as credit risk of fund, if it is a non-gilt fund then what is the credit risk, its rating, its past record, the volatility of its net asset value (NAV). One must also take a good view on the risk that the fund manager is taking. All this data is available in fact sheets distributed by mutual funds to distributors and potential investors.
Pfn: What is your view on ‘capital protection’ investments?
Mr. Nevgi: Capital protected products are likely to be allowed by SEBI. As of now capital protection is not allowed because the sponsor of the mutual fund has to be financially strong enough. However, for capital protection products, especially for the fixed income capital protected products, you need to have a developed interest rate option market, which is not available in India as yet. Globally, capital protected products are offered or rather are structured in the options market. But here in India we don’t have an interest rate option market (as yet), thus offering capital protected products in India is a bit difficult.
Pfn: What is your advice to debt fund investors at this stage?
Mr. Nevgi: I think debt fund investors should focus on the short-term end of the curve and invest in liquid funds, short-term funds and fixed maturity plans. FMPs are a nice idea and we should consider them because FMPs are more tax-efficient than bank FDs. And I think, depending upon how the debt markets hold up over the next six months, it’s a good time to start investing in long-term debt funds once there is clarity on interest rates. .
Pfn: What kind of books do you like to read?
Mr. Nevgi: On the professional front, I have always been fascinated by economics. I enjoy reading books by Samuelson and Satyajeet Das.
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