Inflation was the biggest newsmaker of 2022, and central banks around the world hiked interest rates. India was no exception. The Reserve Bank of India (RBI) hiked the repo rate by 225 basis points (bps) from May 2022 to 6.25 percent.
Predictably, the yield of the benchmark 10-year security went up — from 6.45 percent at the beginning of the year to 7.31 percent, as on December 28, 2022.
Debt funds felt the maximum pain as returns fell. But fund houses started launching target maturity funds to capitalise on the rising interest rates. With inflation coming under control and interest rates assumed to be near their peak, experts believe that, in 2023, how you choose your debt funds and debt investments will be crucial.
Moneycontrol caught up with Marzban Irani, Chief Investment Officer, Fixed Income, LIC Mutual Fund, who has been in the Rs 40-lakh-crore Indian Mutual Fund (MF) industry for close to 22 years.
Having worked at Tata MF, Mirae Asset India MF and DSP MF in the past, Irani has seen the highs and lows of the debt markets, including the great debt crisis of 2008 as well as the COVID-induced liquidity crisis. He feels the worst is over for debt funds, and investors must now get serious about debt allocation.
Q: Interest rates are rising, but experts say they may not go up much more. Should you invest in short-term bonds or is it time to invest in long-term debt?
A: We have seen aggressive rate hikes in 2022 on concerns of rising inflation. We now believe that the phase of rising crude oil prices and food inflation is over. We have also seen the rupee stabilising over a period of time. So rate hikes are declining gradually.
We have come from a 50 bps hike to 35 bps hike in the last monetary policy meeting. We might even see the governor skip it in February and then have a last 25 bps hike in April. Basically, the worst is behind us now.
So, while we were advising investors to invest in very short-term schemes when the interest rates were close to 3.5-4 percent, we are now telling them to invest in medium- to long-term debt, depending on their risk appetite.
Q: There are 16 categories of debt funds. Five are meant for short-term goals, two for short to medium duration and the remaining for long-term goals. Financial planners always tell investors to limit their overall portfolio to about 6-8 mutual fund schemes. How do you even decide which categories of debt funds you should opt for and which ones to avoid?
A: There should be three main categories one should focus on — liquid funds for around three months, banking PSU funds for three years and sovereign gilt funds for anything longer than that.
One category that investors should ideally avoid is credit funds, unless you have the required risk appetite. Even there, my personal recommendation would be to go for hybrid funds or equity funds for that extra return and not include any credit risk funds in your portfolio.
Q: Is this a good time for a novice investor to enter equity markets?
A: Yes, any time is a good time to enter the markets. People should not keep their money in banks and let it idle away. They should be investing it, for their money to work for them.
One should start investing in equity for long-term requirements, like retirement, and deposit money in fixed-income streams for short- and medium-term requirements, like higher education or marriage. The best time to start investing is now.
Q: What’s the one big lesson you have learnt from the debt credit crisis that we saw in the months leading up to the COVID-19 outbreak?
A: One thing that I learnt a long time back and realised it again during the pandemic is to stay away from credit-risk products.
But any new investments made by me at the moment will go into debt because of the sheer attractiveness of the debt market, right now.