The Mutual Fund Show: It Is Time For Investors To Consider Infrastructure?

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KALPEN PAREKH: There is a category called floater, among many categories in the fixed income space, but our observation is that most of these are of low duration, six-month, one-year assets which mature. So, automatically as they mature, they can be reinvested back at the prevailing interest rate six months or one year down the line. So, they are not floater in design, but they end up being floating rate because the maturities are very short. So we launched a floating rate fund in March called the DSP Floater and we have seen early interest in that because on one hand, interest rates have come down, we’ve seen a very big cycle where the 10-year government bond peaked at 9.5% in 2013-14 and today is at roughly 6%. On the other hand, overnight rates are at 3-3.4%, money market rates are at 3.5-4%. So, we’ve seen a huge rate cycle globally as well as in India. On the other hand, all governments globally again as well as in India want to spend a lot of money and deficits are likely to be much higher than what we have seen in the past. So, if you map these two things together, there is a probability that in the next year or two, interest rates are higher than where they are today. Number one.

Number two, currently we are sitting on 11 lakh crore worth of daily liquidity in the banking system. Generally, if you take the last 15 years the first 10 or 12 years, India used to have neutral or negative liquidity in the banking system. The last two, three years because of demonetisation and then supporting growth during the Covid times, and to maintain adequate liquidity, we’ve had this surplus liquidity framework, but at some stage liquidity will start getting normalised. So, our expectation is that if you view the future one year down the line, not just today, there is a possibility that, not just liquidity will tighten but rates will start moving up, very low front-end part of the yield curve will start moving up, and even spreads will widen. You will be surprised to note that AAA bonds and the Government of India bond is more or less borrowing money at the same rates. Normally the spread is 75 basis point higher for corporate India because the credit spread will always be there but because of the surplus liquidity, the spreads have compressed. So, we thought of creating a contrarian product in a way where the portfolio buys a simple five-year Government of India bond for any state development bond, so it’s a sovereign product, it has zero credit risk because we don’t want to play the credit cycle right now. When spreads are virtually zero, there is no spread. So why take credit risk? It’s a five-year government sovereign bond will automatically mature over the next five years and one year, two years down the line, it’s maturity would have come down further. On the other hand, we have designed an interest rate swap so we buy a two-year swap. It neutralises the duration so four year is the duration on the long side, and minus two from the soft side so the net duration is two years today. As we proceed into the next one year the net duration will come down to one year. So that’s how we’ve designed this fund and there is a segment which says that we want to plan for the future cycle of interest rates likely to play out. We don’t mind having a certain percentage of our portfolio in a product like this which is sovereign in nature where liquidity is not an issue. Remember, corporate bonds—the liquidity can dry out overnight when the cycle turns, when liquidity starts coming down, when the rate cycle turns. Even AAA bonds, sometimes have an impact cost. So, we’ve created a very conservative fund right now and the fund is around 2,000 crore in size. I wouldn’t say that people are queuing up to invest in that but discerning investors are asking questions that if I want to hedge against the rising interest rate regime, one or two-three years down the line, if this rising inflation is permanent and if I want to hedge my fixed income portfolio then this can be a good product for that?

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