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Diversify into fixed income funds
August 28, 2009

Amandeep Chopra, Head-Fixed Income at UTI Mutual Fund shares his view on the debt market and his pick of fixed income funds that investors can consider in the current market scenario.

Author : Dhanashri Rane

Untitled Document

Investors can diversify their investment portfolio by investing in mutual funds from the fixed income segment. In order to find out what investment avenues exist in the fixed income market, we interviewed Amandeep Chopra, Head – Fixed Income, UTI Mutual Fund. Furthermore, Amandeep Chopra (AC) lets us know which funds investors can choose to invest according to the holding period of their investment.

Highlighted here are the key points from the interview -

1. The interest rates to remain stable over the short term

2. Adequate liquidity is available in the system

3. Inflation may rise near 6% by march 2010

4. Options for investors with an investment time horizon

  • Of less than six months - Treasury plans

  • Between six month to one year - Short-term income funds

 iFAST: What is your short- to medium-term outlook on fixed income market?

AC: We expect the market to remain largely stable in the short term. The decline in inflation and ample liquidity will support any rise in the bond yields.

However, as the Reserve Bank of India (RBI) and most of the global central banks are moving towards a neutral stance, the trend for the medium-term interest rates is expected to be upwards.

This will be further supported by the revival in global economic growth and supply-driven inflationary pressures.

Chart1 shows that adequate liquidity has helped short-term yields to remain steady (source: iFAST Compilations).

iFAST: Which funds will you recommend to our investors in the present scenario and what should be their investment horizon?

AC: We would recommend the following funds based on the investment horizon of the investor. We would also suggest hybrid funds for long-term financial planning of investors.


Investment Horizon


Name of the fund

1 Year Annualised Returns^ (%)


Up to 6 months

UTI Treasury Advantage Fund


8.41 (as at end-June 2009)

6 month to a year

UTI Short Term Income Fund


10.55 (as at end-May 2009)

1 year and beyond

UTI MIS and UTI MIS Advantage


10.63* (as at end-May 2009)

Source: UTI Mutual Fund

 ^ - Past performance may or may not be sustained in future

* - Returns are shown only for UTI MIS Advantage plan as on 31 May 2009

iFAST: What risks should the investors keep in mind before investing in such funds?

AC: The returns generated from the funds over a short period of time can be volatile, given the volatility in the underlying markets. However, the volatility tends to even out and these funds can deliver superior returns over a medium to longer period of time. It is essential to consider the past track record over the market cycles and the quality of the portfolio along with the reputation of the fund house.


iFAST: RBI has slated a borrowing calendar of Rs. 110,000 crore by end of September. What role will be played by issuance of dated securities in raising money for the government and how will it impact the bond market?

AC: The bond markets have already factored in the revised borrowing calendar and some degree of spillover is reflected in the current 10-year yield at 7.05%. The year-till-date credit growth for FY10 has been poor. With the present deposit growth, the demand for Statutory Liquidity Ratio (amount mandated by RBI to be maintained by all scheduled banks) and investment is supporting the demand for government securities. As described in the previous answer, we expect the rates to remain largely stable unless the RBI begins its tightening cycle earlier than anticipated by the markets.


iFAST: Given the massive government borrowing for present Financial Year (FY) 2009-10 projected at Rs. 451,000 crores, what will be its implications on the availability of adequate funding resources for the corporate sector?

AC: In our view, the enhanced borrowing by Government of India (GOI) is not expected to impact the fund availability for the private sector. RBI has ensured that sufficient liquidity is present in the system to fund the GOI borrowing as well as support the credit demand by the private sector as and when it picks up. Most of the borrowing in the first half of the year is front-ended (about 65% will happen in the first half of FY10) and overnight liquidity is still in a range of Rs. 1.0 to 1.2 trillion. Hence, we do not see any pressure building up in the second half of FY10. Typically, the second half is a busy season for credit growth.

We also need to factor in other mitigating factors, such as higher tax revenue collection, liberalisation of the External Commercial Borrowing window (the government allows Indian companies to borrow from abroad for fresh investments as well as expansion plans) and the RBI's intervention through Open Market Operations (tool used by RBI to add more liquidity into the system by purchase of dated government securities).


iFAST: Despite the negative annual rate of inflation for all commodities, the Consumer Price Index (CPI) shows a positive trend. Going forward, do you foresee inflation pressures returning and how will it affect the RBI’s policy decisions?

AC: The Wholesale Price Index (WPI) is showing a negative trend (see Chart 2, source: iFAST Compilations) largely due to decline in prices of most commodities especially oil. CPI, on the other hand, has a higher component of consumer goods, particularly food articles, which have not declined over the same period.

There is also the impact of a higher base because the inflation index in the second quarter and third quarter of the previous year, i.e., FY09 had risen significantly.

In our view, the inflation as measured by WPI will start picking up in the fourth quarter of FY10 and should be near 6% by March 2010. Inflation could be further aggravated by the recent developments due to poor monsoon which can moreover drive up prices of primary articles. This will impact RBI's further policy actions towards a rate hike and cause some degree of liquidity reduction in the system.



The debt market has already factored in the huge borrowing and presently, the system has adequate liquidity to support any further demand. If inflationheightens owing to poor rainfall, then the possibility of interest rate hike by RBI increases. Otherwise, interest rate scenario will remain stable with an upward movement over medium-term. Treasury plans and short-term bond funds are good avenues to park money for less than six month horizon and for less than one year time period respectively. Overall, the interview has covered the impact of the huge government borrowing programme on the debt market, the policy actions expected from the central banker and gauged the direction in which the interest rates are currently headed.

*MIBOR (Mumbai Inter Bank Offer Rate) is disseminated by National Stock Exchange since 1998. The basic design behind the said rate is the polling methodology– rates are polled from the traders over phone as to what rate they would quote to borrow or lend Rs.500million in the overnight call money market (Source: CCIL).

iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mtual fund. No investment decision should be taken without first viewing a mutual fund's offer document/scheme additional information/scheme information document. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer in the website.

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