Sushil sees the Government’s decision to give FIIs tax breaks on G-Sec investments as hopefully the starting point of many more such moves to attract FII and FDI inflows as the Balance of Payments is currently suffering on account of a weak current account deficit as well as weak capital account flows.
With repo rate at 5.25%, 1 yr CDs at 7% and long bond yields at 7.75%, a 250 bps steepness in yield curve signals that the market has anyway priced in our macro weakness without waiting for repo rate to move. He believes we are already either midway or more than midway into an effective yield hike cycle.
He singles out credit risk funds as an attractive investment opportunity for yield seekers with commensurate risk appetite. Portfolio YTM on Nippon India’s credit risk fund is currently around 9%.
He believes that active management of credits including opportunistic bets on papers due for spread compression can yield reasonable alpha – which should ideally cover fund expenses, leaving YTMs largely accruing to investors through NAV appreciation. This math would work assuming there is no directional move in yields which can create capital gains or losses. In order to mitigate this interest rate risk, he is consciously keeping duration low in this fund.
Credit risk funds also come with a greatly strengthened regulatory framework that ensures fund liquidity – thus providing investors with a liquid and transparent vehicle to participate meaningfully in less than top rated papers.
Nippon India’s credit risk fund has 40% allocation to G-Secs and AAA papers and 50-55% allocation to higher yielding AA- and other papers.
He acknowledges that HNIs have taken to private credit AIFs in a big way in their quest for double digit returns, but cautions that unlike US, our private credit AIFs are locked in for 4-5 years.
Between these two ends, there are PMS solutions which typically have 8-10 securities in their portfolios and offer much better liquidity compared to AIFs, but potentially lot more volatility compared to credit risk funds.
On balance, he believes that credit risk mutual funds are perhaps the wisest option for investors seeking higher yield opportunities.