Q . The RBI is trying to absorb excess liquidity from the system by introducing a Standing Deposit Facility (SDF). How will it influence the market? Do you think that the year 2022 will be a challenging year for debt investments with possible rate hikes and high government borrowing?
Answer : Introduction of SDF in April 2022 at 3.75% in effect made reverse repo rate redundant and narrowed the policy rate corridor back to pre-pandemic period. The immediate impact was that yield across the curve rose as this marked a definite shift in RBI’s policy pivot towards inflation. The short-term rates which were relatively anchored due to ample domestic liquidity and low policy rates shifted up more. This along with hawkish policy statement set the tone for the rate hike which happened in an out of turn meeting in May 2022.
Going forward, elevated commodity and energy prices, large government borrowing program, resilient CPI and WPI, high SLR holding of banks, accelerated tightening by major global central banks etc. are likely to drive yields higher. The possibility of RBI expediting the pace of pull back in monetary stimulus should also add to the pressure. The chances of lower fiscal deficit appear dim too as the outgo on food and fertilizers subsidy might exceed the gain expected due to higher tax collections. Thus, in the near term, overall environment appears adversely placed for fixed income market. However, one should also consider that 10Y yields have moved up by ~85-90 bps in CYTD22 to 7.31% (upto 16th May 2022) and thus, impact of the aforesaid factors has been priced in to a material extent, in our view. Further, real yields based on one year forward inflation forecast appear reasonable. While the yields can still rise from here on, for medium to long term investors it could provide an attractive investment opportunity.
Q . Could you walk us through your fund's structure and the management personnel?
Answer : HDFC Short Term Debt Fund is focused on generating returns through interest accruals with relatively short duration. The Scheme invests in instruments such that the Macaulay Duration of the portfolio is between 1 year and 3 years. As of 30th April 2022, the Macaulay Duration of the portfolio is 1.87 years. Further, in terms of rating allocation, the portfolio is predominantly invested in AAA/A1+ rated or equivalent securities (~85% of AUM as of 30th April 2022).
Q . Ideally, what time horizon must an investor have, in order to consider investing in a fund like yours?
Answer : HDFC Short Term Debt Fund is suitable for investors with an investment horizon of more than 12 months. The longer the better as carry tends to negate the impact of movement in yields to a large extent. Additionally, given the relatively low duration risk as the Macaulay duration is maintained between 1 to 3 years, it is observed that impact of mark to market is increasingly lower as the holding period increases.
Q . What risk management tools do you have in place in order to minimize the risk to your portfolio?
Answer : At HDFC Mutual Fund, our investment philosophy prioritises Safety, Liquidity and Returns (SLR), generally in that order. This has helped us manage liquidity during bouts of volatility. We also lay emphasis on 4 C’s of Credit viz.
Character of Management (e.g. avoided exposure to a large distressed housing finance company)
Capacity to Pay (e.g. avoided exposure to a large distressed infrastructure company)
Collateral pledged to secure debt (e.g. recovered large portion of investment backed by shares of large media company)
Covenants of debt (e.g. recovered investment from a MFI player due to covenants)
Further, Risk Control is achieved through conservative sizing of exposure based on proprietary Credit Scoring Model which factors in – Parentage, Financials, Rating & Outlook.
The fund has maintained over 80% of AUM in AAA or equivalent rated securities since December 2014.
Q . Considering the current market scenario, which debt category do you suggest to an investor with a 2-3-year time horizon?
Ans: One of the key principles of investment in debt mutual fund, in my view, is to invest in those schemes whose duration is close to investment horizon of the investor. Given the investment horizon is 2-3 years, one should invest in schemes like short term debt which are required to maintain duration between 1 to 3 years. Argument to invest in short duration schemes is further strengthened in light of uncertainty regarding how long the war will continue, the resultant impact on crude and other commodities including agriculture commodities, path of US yields, etc.
Views expressed herein as on (date) 20th May 2022, involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied herein. The data/statistics are given to explain general market trends in the securities market, and has been prepared on the basis of information which is already available in publicly accessible media. Stocks/Sectors referred are illustrative and should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund (“the Fund”) / HDFC Asset Management Company Limited (HDFC AMC) to buy or sell the stock or any other security covered under the respective sector/s. The Fund may or may not have any present or future positions in these sectors. Past performance may or may not be sustained in future. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Readers should seek professional advice before taking any investment related decisions.
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