Mr. Amandeep Chopra

Group President and Head of Fixed Income at UTI Asset Management Company Ltd

Amandeep Chopra is the Group President and Head of Fixed Income of our Company. He holds a B.Sc degree from University of Delhi and an MBA degree from University of Delhi. He joined Erstwhile UTI on June 27, 1994 and was subsequently transferred to our Company with effect from January 15, 2003. Prior to joining erstwhile UTI, he was associated with Aaina Exports Private Limited and Stenay Limited.

Q . What are your views on fixed income market in current scenario? How do you see the yields moving in near to mid-term and why?

Answer : The markets are witnessing high levels of volatilities due to geo-political crisis, slowdown of demand from China, rising Brent crude oil prices, lingering supply side shocks, all this resulting in increasing inflationary pressures and growth concerns across the globe.

We believe that the RBI had decisively shifted towards achieving its inflation target of 4% in the April 2022 policy. Given the glide path towards 4% could be unwieldly due to the supply side shocks, it would require MPC to front load its policy actions & maintain a positive real rate for an extended period of time to establish a “sense of credibility”. Given the unusually uncertain environment, the RBI has understandably refrained from committing to a terminal rate for now.

Our base case is of a terminal repo rate between 6%-6.5% in the next 12-15 months which we believe is largely priced in the short to medium part of the curve (2-5 year) although near term actions such as change in borrowing mix, possible RBI interventions (Operation twists) & global cues could impart intermittent volatility in the near term. The yield curve which had been considerably steep in the last 2 years has largely flattened on expectations of policy normalisation. However, the expected heavy centre/state bond supply could weigh on the long end of the yield curve (10 year & beyond) in the near term. The envisaged terminal rate, however, might not materialize incase of a sharp slowdown of the global economy due to aggressive rate actions by the US Federal Reserve or easing of geo-political tensions in Europe.

Q . Can you talk about the risks that come with debt investing and how investors can manage them?

Answer : Different types of mutual fund schemes expose investors to different risks. While debt funds are traditionally considered safer haven for their predominant investments in fixed income securities, there are some risks in debt fund investing.

While there are broadly two risks surrounding debt funds, namely credit risk and interest rate risk, past credit events have highlighted another investment risk within debt funds, viz. liquidity risk.

Credit Risk : refers to the risk of default by the issuer entity. Such risk is measured through the issuer entities; credit ratings, which incorporate the historical information and the probability of future defaults. Such credit risk is managed by investing in higher-rated debt securities and regularly monitoring the debt portfolio for any adverse credit events. Further, fund managers tend to have internal limits such as companies, group companies, type of investible securities, etc within the preview of SEBI Regulations.

Interest Rate Risk : refers to the risk of changes in the market interest rates and consequent changes in the portfolio valuation. Such interest rates change due to any announcements made by RBI on monetary policy or any other action taken by the RBI or government which impacts the benchmark interest rate, outlook on inflation etc. The fund manager manages the interest rate risk by managing the fund duration

Liquidity Risk: refers to the risk of not being able to liquidate the investments at fair value as and when the need arises. Such circumstances can arise due to the lower demand/ decrease in demand due to adverse changes to specific issuers/ group. It is managed by maintaining higher-rated securities for better liquidity, maintaining a liquid portfolio, and maintaining a diversified portfolio to maintain an optimum balance between the risk and returns

Investors can maintain their debt allocation by investing across different debt schemes and manage risks accordingly depending upon their risk profile and investment horizon. Thus, investors must make an informed decision while making an investment decision for debt funds.

Q . Do you see another interest rate hike in June 2022. And if yes, what will be its impact on the debt market?

Answer : Market was anticipating further rate hike in the scheduled policy meet on June-22 while the out-of-turn hike in repo rates by 40 bps and increase in CRR by 50 bps in May was a surprise for the markets. In its June policy, MPC increased repo rate by 50 bps, which was in line with the consensus market expectations of frontloaded normalisation of policy rates closer to pre pandemic levels. The MPC maintained its “withdrawal of accommodation” stance while dropping the phrase “staying accommodative”, signalling a shift towards “neutrality”.

Market participants will be keenly looking at the RBI at the upcoming policies to assess direction on terminal rate which we believe could be the next big trigger apart from evolution of inflation.

Q . A lot of investors have low confidence in debt funds. Please give some suggestions to these investors to allay their fears and invest in debt funds?

Answer : Over the last few years, courtesy of splendid marketing blitz campaigns like “mutual fund sahi hai”, has helped to grow awareness that mutual funds are a great investment vehicle for mass public. Investors, who in the past relied on traditional investment vehicles like Gold, Real estate and Fixed Deposits are now also considering mutual funds as an option. With growing awareness and improved means to invest in these products (physical to digital means), the industry seems to be on the cusp of greater adoption by mass public as time goes ahead.

Over the years, market regulator SEBI has set regulations for the mutual fund industry aimed at investor interest by bringing in uniformity in fund classification, valuation methodology, rationalization of expenses, increase in transparency through disclosures, PRC (potential risk class) matrix and swing pricing.

Debt mutual fund industry has also evolved during the years. There are different funds available for all set of investors which are curated based on maturity profile, credit rating, investment horizon and sensitivity to interest rate cycles.

Moreover, in last few years, passive investing has also been gathering pace in the debt mutual funds space. Low-cost debt index funds or exchange-traded funds (ETFs) have gained popularity among mutual fund houses and this is expected to continue.

Q . When it comes to investing for a horizon of two to three years, there are a lot of options for investors – there are banking and PSU funds, short-term funds and corporate bond funds. Can you talk about how each of these are different? Is there any one category that is ideal for this duration?

Answer : We believe asset allocation in a combination of debt products and keeping the investment horizon aligned with the fund maturity is important.

Given the meaningful correction in the last 2 months across the curve, investors with more than 3 year investment horizon can contemplate staggered allocation towards roll down strategies & actively managed duration categories. Investors looking at short term allocations can consider overnight/liquid/money market funds as we navigate near term uncertainty & await RBI’s stance on liquidity/terminal rates in upcoming policies.

Q . Please comment on the quality/credit rating profile of your key debt funds.

Answer : We believe in protecting the interests of our investors and hence our debt funds’ portfolio is invested in well-researched and predominantly in AAA/AA+ rated issuers that offer high levels of credit profile and liquidity to the portfolio. These issuers are duly assessed by our analyst team on a regular basis and closely monitored for any kind of rating shifts and other warning signals.

Further, we are maintaining duration of our funds towards short end of the curve, which mirrors our conservative stance on duration given expectations on further rate hikes by the RBI.

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