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2018 will see better returns for debt fund investors

Avnish Jain, Head of Fixed Income, Canara Robeco MF

4th January 2018

In a nutshell

Avnish believes that yields have already climbed up substantially on the back of a confluence of negative news on inflation, on fiscal deficit and on subdued GST collections. However, with inflation likely to remain within RBI's comfort zone and with a gradual uptick in compliance likely boosting GST collections, yields look set to trend down in 2018, thus spelling good news for debt fund investors in 2018.

WF: Fixed income funds have disappointed in 2017, with 1 year returns ranging between 4% and 6.5% across all categories (other than liquid). What went wrong, what did we not see coming?

Avnish: Volatility is inherent in asset markets and debt market is no different. In recent years we have seen large volatility in debt markets with some years showing single digit returns while in others double digit returns were generated. Over long term, returns have been in high single digits. In 2017, uptick in inflation and fiscal concerns coupled with tight liquidity conditions at the end of the year impacted yields adversely which pushed one year returns lower.

WF: What is the prognosis for 2018?

Avnish: Inflation is expected to peak out in 1QCY18 and should trend lower from here and remain largely within RBI's range of 2%-6%, obviating any need to move repo rate higher. Growth remains a concern with investment cycle not picking up. It is expected that RBI is likely to remain in "pause" mode. Government has already announced some extra borrowing to tide over near termshortfall in expected GST collections. While fiscal may be impacted in near term as GST implementation stabilises, but over long term, as more and more entities register for GST, tax collection efficiency is likely to improve thereby reducing government deficit. GST is further expected to moderate inflation. Yields have already climbed a lot due to confluence of negative news. 2018 should see yields trend lower with better returns for debt investors.

WF: How have your fixed income funds performed in CY2017? What steps did you take to minimize volatility in recent months?

Avnish: In their respective categories, CR debt funds have performed well compared to peer group. While the long term debt view is driven by underlying macro-economic factors, both global and local, all CR debt funds are actively managed which helps us to manage any intermediate volatility.

WF: Looking ahead, where do you see the best opportunities in the fixed income market in 2018?

Avnish: Short to medium term (upto 15 years) government bonds provide good opportunity as yields have gone up sharply in past few months. Short term AAA corporate bonds (3-5 year) space also present good opportunity as the recent sell-off (on tight liquidity) has driven yields higher.

WF: How are SEBI's new fund classification rules impacting your fixed income funds?

Avnish: CR debt funds are not impacted due to the new fund classification as we never had plethora of debt funds to start with. In fact, with the categories defined by SEBI we should be able to launch new funds depending on market conditions and investor appetite.

WF: Are you making any new product plans in the fixed income space for 2018?

Avnish: The new scheme categorisation gives us more space to launch newer funds. However this will be dependent on investor appetite and appropriate market conditions for the various kinds of debt products defined by SEBI.

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