Mr. Nilesh Shah is the Chief Investment Officer (CIO) of PruICICI Mutual Fund. He joined Prudential ICICI Mutual Fund as CIO in June 2004. In the past, Mr. Shah has worked with Franklin Templeton Mutual Fund, ICICI Securities & Finance Company Limited and ICICI Ltd.
In an exclusive interview with Personalfn, Mr. Nilesh Shah shares his views on the monetary policy, inflation, interest rates and how investors in the debt funds segment need to position themselves going forward.
Pfn: What is your view on the monetary policy?
Mr. Shah: The Reserve Bank of India has come out with a flexible policy that seeks to do justice to its objective of encouraging growth, maintaining price stability, managing exchange rate and ensuring a smooth passage of the government borrowing programme. The focus of the monetary policy is clearly on prompt and calibrated action to maintain an equilibrium among all these conflicting factors. While the present emphasis seems to be on inflation management and price stability, the hike in repo and reverse repo rates seem to suggest that RBI is watching inflation carefully.
While the monetary policy announced has been largely in line with the market expectations, the central bank’s move to increase repo rates by 25 basis points was slightly unexpected.
The central bank has proposed that the NDS-OM order-matching module be extended to insurance companies since they are mandated to invest into government securities. We believe that it would be appropriate if the mandate to participate in the electronic screen based trading platform is also extended to mutual funds, given that fund houses offer various schemes exclusively dedicated to investing in government securities. Among the other progressive steps taken by the RBI, the proposal to allow intra-day short sell of government securities will result in better price discovery. Also, the consolidation of government securities as proposed by the RBI will generate better volumes and deepen derivatives market.
Pfn: Do you think inflation and rising interest rates in the economies like the US will be a concern going forward?
Mr. Shah: For the debt markets, the robust GDP growth that has exceeded expectations and the healthy flow of liquidity are the positives. On the other hand, the concerns include the weakening of the rupee, the widening deficit and the rising prices of oil that would impact inflation. International developments including the strengthening of the dollar and the rising interest rates in the US are certainly factors that could impact most countries, including India. With yesterday’s monetary policy having given clues in terms of how policy plans to respond to these signals, the factors to watch out for now would include liquidity, oil prices and US yields.
Pfn: Please also share your views on the recent volatility in the value of the Rupee and your outlook for the same. How do you see these factors impacting interest rates in the domestic markets?
Mr. Shah: Rupee was trading way above its fair value as suggested by the REER model of the RBI. The whole market was long Rupee and short dollar to the extent possible. Such technical imbalance cannot stand for long. The prices do come back to fair value over a period of time. Unless rupee depreciates big time, interest rates are unlikely to be impacted by the same.
Pfn: When do you think investors should consider getting into long-term debt funds? What is the investment strategy in your long-term debt funds?
Mr. Shah: We recommend that investors look at long term debt funds with a minimum investment horizon of one year, only when the 10-year yield is close to 7.35%-7.50%. Investors seeking capital protection may want to look at the liquid, floater and short term plan.
On the debt side, we believe in generating the optimum returns without exposing the portfolio to undue interest rate risks and liquidity risks, as the long term debt funds are for investors with a medium to long term horizon looking for steady returns with some market volatility. In addition to active duration management we consistently look for opportunities available to better returns on the portfolio. We have strong risk management systems to prevent unwarranted risks that may otherwise arrive in pursuit of returns. Non justifiable credit risk, interest rate risk and liquidity risk are three parameters that our debt funds just won’t compromise on for better returns.
Pfn: Do you think fixed deposits assume more significance at this stage?
Mr. Shah: Fixed Deposits always have a role in the portfolio of risk averse investors. The perceived credit safety and notional immunity from interest rate risk makes fixed deposit an alternative investment option for risk averse investors.
Pfn: What is your advice to the retail investor?
Mr. Shah: Equity or debt should be a function of one’s asset allocation and not a function of market levels. Hence, we strongly advise investors to practice asset allocation.
For debt investors seeking capital protection, we would recommend floater, short-term and liquid funds. Debt investors seeking capital appreciation may want to look at the MIP. Investors with a one-year investment horizon may want to consider investing in a short term plan or MIP. Systematic Investment Plan is the most effective way of investing in market especially in a volatile market. Our recommendation to investors is that one should use SIP to make volatility their friend rather than enemy.
Add Comments