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.

Q1. Many investors lack faith in debt funds to help them achieve their financial objectives. Can debt markets offer investors double-digit returns in the long-term? Which mix of debt funds would you suggest?

No. Going forward Debt funds may offer double digit returns for a span of few years, but it is incorrect to expect double digit returns in the long term. The long term returns of debt funds will be anchored around the yield of the bonds – which is around 7.5% currently. Active management can only increase alpha by some amount. It is unlikely that active management can give returns in double digit – when the YTM of the bonds is under 8%.

We prefer dynamic bond funds and short-term fund category. With the change of the taxation the active funds will need to take bigger calls – and I believe that this will only be better for the industry.

Q2. Recently, Indian mutual funds and their salesperson attempted to incite a "buying" panic. This was in response to a new taxation rule that came into effect on April 1, 2023. Does that mean curtains for debt funds in the new financial year?

Not at all. The debt funds still offer significant advantages over many other traditional investment opportunities life FD. They are easier to exit, with no penalty. In case yields come lower, in debt funds one can make capital gains. Also, in active debt funds the risk can be dialled up or down – which is rare in other investment channels.

Q3. For the upcoming year, the government has made numerous adjustments to the taxation, returns, and other aspects of investment regulations in mutual funds. Could you please offer some effective investment strategies for novice investors taking into account the new rules?

I would suggest such an investor to invest in active funds with lower credit risks. The active funds will ensure that the Fund manager is taking most of the interest calls – which is needed as the investor may not be having enough experience to take such calls themselves. Since the investor may already be having FD in their investments, they can delay investments into passive funds.

Also, usually novice investors may get swayed by higher YTM or past returns. Often, not always, these are higher because of credit risks that these funds may be taking. As we have seen in the past, these credit risks may give consistently good returns, but can give large losses when the turn sour. Credit risks are more a domain of sophisticated investor, and I believe that the novice investors should take time before adding such risks to their portfolio.

Q4. Please comment on the quality/ credit rating of your primary debt funds.

We believe that most of our investors invest in debt funds to get reasonable return – but primarily to protect their capital. Under this philosophy we are very quality conscious. We select a credit universe as a fund house that is approved by our credit committee. This universe has companies having not only strong financial strength but also and good governance. However, every fund of ours has its own investor class – depending upon their risk profile. Thus, within the credit universe, each fund would only select credits that are suitable for the investor class.

Most of our funds are invested in the highest rating of AAA or A1+ papers. However, in some funds we do take very selected AA+ papers – which we believe have strong risk profile. We generally are conscious of investments in lower rated papers and as of now only our credit risk fund has long term AA rated papers– which is a regulatory requirement.

Q5. Are there opportunities for retail traders to make money in bonds trading? Or is it a big guy’s domain?

Bonds in India are more of an institutional play. The data that drives the bonds is less widely disseminated, and the practical literature on India’s fixed income markets is limited and rare. Thus, there is information asymmetry for retail traders. On the other hand, they would be trading against insitututional traders who have better access to data, information and are probably more experienced. I strongly believe that this information asymmetry makes bonds trading much more of a barrier for retail. While they may be able to get one-off calls right – it may be driven more by fortune and difficult to replicate it in long term.

Q6. Inflation having breached the upper tolerance band of 6% for two consecutive months, January and February 2023. What are your expectations on the RBI to hike repo rate for the upcoming rate? What have you planned for your current portfolio?

RBI is close to the peak rates. I personally believe that the last of rate hikes is behind us – but if data worsens a final rate hike will not be a surprise. Yet, I believe that a final hike or not is not an important consideration to make a portfolio. We are at the end of the rate cycle – and waiting for final 5-10 bp rise in yields before investing is being penny wise and pound foolish. We have seen how the rates have crashed dramatically in developed markets – even when Central banks are hiking rates. A more dovish central banks will mean further yield fall.

We added duration in our portfolio couple of months back – as we believed that the worst of the expectations was getting priced in. We maintain higher duration in our portfolios for the time being.

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