Mr. Sandeep Yadav
Senior Vice President, Head – Fixed Income, DSP Mutual Fund
Mr. Sandeep has a total work experience of almost 20 years.
He joined DSP Investment Managers in September 2021 as Senior Vice President Fixed Income Investments, Sandeep has previously worked for Yes Bank, and had headed the Derivatives Structuring, Fixed Income Trading and Primary Dealership. Prior to that Sandeep had worked in Technology space in Cognizant Technologies, Hughes Services and Mahindra British Telecom.
He is a Computer Engineer (Pune University) and PGDBM (IIM Bangalore). Sandeep is also a CFA chartered holder.
Q . Investors are concerned about an imminent hike in interest rates. With the US Fed raising rates, most analysts believe the RBI may also start hiking rates in the coming months. What are your views on it?
Answer : We think that the RBI will start hiking rates this year, clearly stating that the monetary policy will pivot to addressing inflation rather than growth concerns. A clear sign was increasing inflation forecast from 4.5% for FY23 to 5.7% in the April meeting, which is close to RBI’s stated upper band of 6%. The Fed’s hikes are also data dependent and indeed the US is showing strong growth. However, if one shifts focus to Europe or UK, the language is still mixed as they are unsure of their growth.
Q . What would be your argument in favour of debt funds when traditional fixed income instruments at the short end of maturity are offering better returns?
Answer : Mutual funds provide a diversified basket of instruments that addresses certain risk issues. Also, by short end we presume that you mean liquid plan, ultra-short and low duration. Note that these funds will reprice quickly based on market movement in yields (we at DSP maintain such ladders to address reinvestment/liquidity risks) – so there will be times when traditional investments offer better returns, but the mutual funds will catch up and surpass these returns.
Q . According to you, what will be the impact of the rise in global crude oil prices on the debt market as uncertainty on the geopolitical front is still looming?
Answer : The simplest part of the question to answer is that a rise in crude oil prices is generally unfavourable to debt markets. A USD 5/bl increase in oil prices causes an estimated 0.2% of GDP (USD 7bn) widening of the current account deficit and add ~10bps to inflation (~20bps including indirect). The tricky part is this – oil seems to be a commodity that we either have too much or too little of. The same shift in geopolitical situation can cause Iranian and Venezuelan oil back into the market, and cause prices to fall. If one removes the geopolitical issues and the risk premia that causes build up in speculative positions, the reason why oil prices did go up was the demand (as economies were opening up) – supply (as OPEC was controlling supply) gap. This we can expect to normalize in H2FY22. Oil is a focus commodity, but several others add to the inflation basket – food, base metals etc. They all appear to be volatile.
Q . Poor returns offered by debt mutual funds have been worrying many debt fund investors. Do you think the situation will improve?
Answer : Yes, it will is easy to say, but when is the difficult answer. Till now, the bond market was confronted where the central banks kept policy easy – low interest rates and abundant liquidity – to address the pandemic related concerns. Note that even before the pandemic hit, the Central Banks had a dismal outlook on growth and were fighting for inflation rather than inflation. However, this situation appears to be changing, and the investors are likely to get better real returns (that is yield – inflation) going forward. Among the factors that are affecting interest rates locally is the large INR 14.5trn borrowing program by the Government, a supply which we think is difficult to absorb without some sort of RBI support. In an environment that RBI has already been a large buyer of government securities and is fighting inflation, we have to wait for cues from that. Already, in the developed world there are some growth concerns as we mentioned earlier. Through FY23, we may expect interest rates to peak basis what we know now.
Q . In the current scenario, which debt fund category is best suitable for an investor with a horizon of 1-2 years?
Answer : In an uncertain world, it is best equally to focus on risk rather than returns. Given the time horizon mentioned as 1-2 years, investors would do better to invest in scheme with a duration of less than 2 years – e.g. up to short term plans.
Q . What is the investment strategy being followed by your flagship debt funds? How are you selecting the securities?
Answer : Our investment strategy starts with our market view – we expect interest rates to rise in the near-term, and hence are positioned in the lower end of duration bands for most schemes. The duration can be constructed in many ways – for example, a 1 year can be made of just 1 year securities, or 80% cash and 20% in 5 year duration papers. The strategy on that depends on the scheme, the volatility that is associated with arriving at the returns, and many near-term factors on interest rate drivers including demand-supply. As of now, we have reduced the barbell. On the choice of credit papers, we are driven by the liquidity of the papers, and governance risk associated with the Companies. In fact, much of our effort goes in addressing governance risks.
