'RBI doesn't want the system to get into a Lehman kind of situation'

Advisors have a more important role to play than asset management companies, when it comes to informing investors thinks Dwijendra Srivastava, head of fixed income at Sundaram Mutual Fund. Speaking to DNA, he says fixed income can be a good avenue for investors looking to invest their short-term funds. Excerpts:

Food inflation came in recently at a four-week high. Oil prices too are back to the $100+ levels. What is your outlook on inflation going ahead?
Instead of just looking at the week-on-week numbers, we should also look at the way the inflation is heading. In fact, there has been a constant inflow and outflow problem in India. If you look at it right now, anything that raises prices is a concern. We are in a phase of growth right now and need a lot of raw materials to take our growth to the next level. We are the second most populous country, so food inflation will be a concern. Although primary articles form a small component of the wholesale price index, it is a volatile component and will continue to remain volatile for sometime, until we address the structural issues. We are not using our capacities fully, despite growing at 8.5%, we are still facing the same issues we were facing before the crisis in 2008. So, long-term solutions need to be provided for these problems. With the global economy stabilising, there is a very high likelihood that the demand for energy will come in. We will continue to see flip flops in the short term.

What is the average duration of long-term and short-term funds at Sundaram? Are you comfortable with the duration?
In the long-term funds, we are seeing 3 to 3.5 years and short-term funds we are largely in liquid, liquid plus products, so the average duration is 15-20 months and 24-26 months, respectively. We run the funds in their risk parameters; we don’t want to take excessive risk in a particular risk category. The liquid product is anyway mandated by the regulator, but still, within the given mandates of the regulator, we want to create that portfolio in a highly liquid security and also focus on the liquidity part of the fund. Regarding liquid plus, since it is a different category and positioned in the debt-oriented scheme category, we take 5% mark to market and stick to that on a dynamic basis. Typically, the corporates look at the fixed-term plans, where they achieve the return with a fixed term in mind. In a high interest rate environment, the fixed maturity plans becomes popular.

Where is the liquidity situation headed?
The Reserve Bank of India (RBI) did two important things in the last monetary policy. One, they turned the repo rate into a signalling rate while introducing the marginal standing facility; second, they raised the savings rate by 50 basis points. These two steps are very important from a liquidity point of view. The regulator doesn’t want the system to enter a Lehman Brothers kind of situation, where the liquidity is very tight. Now, if you notice, this is the longest streak of negative liquidity where it has lasted for more than a year on an average. There is a high demand for funds at the moment, so we expect the liquidity situation to get tighter going ahead.

What is your advice to the retail investor in this situation?
Use fixed income as a judicious asset class. I completely agree that equity has to be the long-term play for the young investor. But they can still invest in liquid funds on a short-term basis; their money will work for them. There is only so much that an asset management company can do, but the advisors have to plan for the investors’ money and inform them regarding these things. We, at Sundaram, aim at educating our investors whenever we can. Even when it comes to taxation, advisors need to do more. If investors put their short-term funds in banks where they are in a marginal taxation rate of more that 14-15%, they will be wasting their money.

Where do you see commercial paper and certificate of deposit rates going?
Commercial paper (CP) is more of a flexible option. We are seeing a decline in issuances of CP, as corporates are very rate sensitive. We are not seeing many blue chip corporates coming and borrowing short term in CP, if they are coming in at all, they are looking at long-term borrowing. In certificate of deposit (CD), we are seeing a plethora of issuances, in June there is about Rs1.23-1.3 lakh crore worth of maturities coming up for CDs. In the last one week, CD rates went up from 9.2-9.3% to 9.6-9.7%; we expect that this could breach the 10% level, because the issuances are very heavy. Looking at the inflation in the near term, it looks like this trend of higher rates could continue for another 3 to 6 months. Having said that the demand for money will go down after a certain level. After a 10% level, the issuer gets a little hesitant to issue CDs.

Are you invested in interest rate futures? Why are mutual funds shying away from this instrument?
We haven’t invested in these because the pricing is an issue. It is also why not many participants aren’t coming in for this. Earlier (in 2003), the benchmark was not that great, now that is okay, but the liquidity is not there. Until many people come in and use such smart instruments it will not be successful.