With a degree in Mechanical Engineering and a Masters in Business Administration, Mr Sandesh Kirkire has over 10 years experience in corporate finance, investment banking and trading in the debt market. He gained some valuable experience while working with SBI Capital Markets and ITC Bhadrachalam before he joined Kotak Mahindra in 1994.

Currently he is the Vice President, Fixed Income Securities in Kotak Mahindra Asset Management Company and manages the K-Bond and K-Gilt funds.

In an interview to personalfn.com, Mr. Kirkire spoke on the rally in government securities, inflows in income funds, bond yields and how income funds could be a very good investment option vis-à-vis other instruments.

PFN: What is your view on the global economic environment? How do you see this impacting India?

Mr. Kirkire: The slowdown in the US continues. The recent rate cut on December 11, 2001 by the US Fed , the 11th cut since the beginning of the calender year substantiates this. However, the statement by the US Fed does indicate a tentative economic recovery. I believe we should see a pick up in demand in both the US and India in the next two quarters.

PFN: Yields in the government securities market have declined significantly over the last few months. What's your view on this rally? Will it last for long?

Mr. Kirkire: We saw a reaction in the asset prices in the last few trading sessions followed by an auction announcement by the RBI. A large scale profit booking with not sufficient support coming from the traders, largely foreign banks and the foreign Primary Dealers who have their year ending in December saw prices tumbling.

The 10 year security yield rose to 8.20% levels up from 7.80% in a matter of 3 to 4 trading sessions. However, we saw the yields to fall back to 8.05% levels immediately indicating the underlying positive sentiment. There are indications of the Government accepting the recommendations of Dr.Reddy committee on small savings thus paving the way for the banks to drop their deposit rates. A move has already been made by the State Bank on this front. I think after the recent correction we expect the yields to again rally back till the budget. The budget would then give a signal for the yield curve going ahead. The long term sustainability of the yield curve ofcourse depends upon the fiscal situation of the government and the extent of credit pickup.

PFN: Income funds have witnessed a surge over the last few months. Do you see this trend persisting over the near term? How does India compare vis-a-vis global averages with respect to mutual fund money allocation?

Mr. Kirkire: Yes, I believe that the flow into the the income funds would continue allbeit at a slower speed. The income funds with their quality portfolios continue to offer the best fixed income investment for the investors. I think globally the equity funds do have a higher allocation than the bond funds. Over the last one year, when the equity markets have not been doing well and interest rates have been coming down there have been higher inflows into the debt and money market funds. As far as India is concerned, the inflows have been largely into the debt funds over the last two years. However, the equity funds too have starting seeing some inflows with the improvement in the sentiment.

PFN: Investors continue to look at fixed deposits vis-à-vis debt funds to park their funds. After being in existence for such a long time, what in your opinion has prevented income funds from replacing FDs in the investor’s portfolio?

Mr. Kirkire: I think a significant shift has happened into the income funds from the fixed deposits. A few years back it was largely the NBFCs which garnered large fixed deposits from the market. However, with a fall of many NBFCs there are a very few NBFCs left. The income funds continue to be the best choice for investors looking at parking funds in fixed income securities.

PFN: In our previous interview, you were optimistic about retail investors taking to gilt funds once they begin functioning like proxy bank deposits. That has not happened so far, do you see that happening in the near future?

Mr. Kirkire: I think it is a very slow process. Although the retail investors entering into the gilt fund has increased, the preference continues to be that of income funds. In any case as the income funds invest about 30% of their portfolio into gilts the retail investor continues to access the gilt market through the income funds.

PFN: A lot of income fund investors haven’t really understood the concept of yields and returns. That is why we find investors entering these funds even at high levels, from where there is little scope for appreciation. What is your advice to the income fund investor?

Mr. Kirkire: The income schemes consisting of the liquid scheme, the bond scheme and the gilt scheme and each having a different portfolio. Each portfolio has a different duration and hence a different risk. This risk gets mitigated through a particular investment horizon. Hence we have different products for different investment horizons. For eg. for investment horizons upto 3 months our K Liquid scheme is the recommended scheme; for investment horizons of 3 to 6 months the K Gilt Savings Plan is the ideal scheme; for investment horizons above 6 months the K Bond is the ideal scheme while the K Gilt Investment Plan is ideal for investment horizons above 1 year.

PFN: What kind of inflows have you seen in K Bond and K Gilt over the past few months? Are you concerned, because obviously these inflows can’t be sustained for long?

Mr. Kirkire: We have seen healthy inflows into our debt schemes over the past few months. We believe that these inflows could be sustained if the investors follow a disciplined strategy by investing in different income schemes according to their investment horizon.

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