The changes proposed by the market regulator Securities and Exchange Board of India (SEBI) to Perpetual bond valuations will have no direct impact on equity markets, but may adversely impact the ability of banks to raise capital, says Sandeep Bagla, CEO of Trust Mutual Fund.

Share Market Live

NSE

Bagla also spoke about the recent developments in the debt mutual fund segment in interaction with CNBC-TV18.com.

Debt mutual funds saw inflows of Rs 1,735 crore last month, while in January, the segment saw a net outflow of Rs 33,409 crore. Please explain this scenario and the reason for the same?

Debt Funds are witnessing outflows as the increased Government borrowing is putting upward pressure on yields of longer-term bonds. There is widespread expectation of global reflation which is fuelling inflationary expectations which could lead to higher yields on long term bonds. The central banks are expected to keep short term rates low and liquidity easy which is likely to keep yields on lower maturity bonds subdued, leading to futher steepening of the yield curve.

Since the start of 2021, bond yields have risen amid improving global growth and inflation expectations. This is likely to apply upward pressure on rates. What should be investors’ strategy if the spike in the yields continues in near future?

In an environment where yield curves are expected to steepen, the strategic allocation of a bond portfolio could be made to funds having maturity buckets of 3-4 year maturity as the interest on such funds is quite attractive compared to liquid funds. Exposure to bond funds with longer-term maturities could be considered more on a tactical basis.

Fears of redemption pressure are looming in the mutual fund sector particularly since the SEBI proposal for alteration in perpetual bond valuations. How deep cut you think this will have on funds NAV and simultaneously on equity markets?

Uncertainty over bond valuations is undesirable from a market perspective as it could lead to sub-optimal decisions by fund managers as well as investors. There is unlikely to be any fundamental change in the credit profile of the issuers due to the changes in valuation rules. Different bonds are likely to see differing levels of valuation change dependent on market yields and coupon rates of the bonds. There is no clear and direct impact on equity markets except that the ability of banks to raise capital may get adversely impacted.

SEBI has restricted MF’s exposure to additional tier 1 & 2 (AT1 & AT2) bonds to under 10 percent. What will be the impact of the move?

Once the clarity emerges from SEBI, it is quite possible that schemes that have stayed away from such investments due to lack of clarity may start investing in such bonds. Also, the existing investments in additional tier 1 & 2 bonds are likely to be grandfathered.

How do you plan to ensure sustainable investment into the debt markets and what are expectations from the regulators?

Regulators have strengthened the market infrastructure from time to time and we continue to expect incremental reforms from the regulators. Debt markets are subject to economic cycles and what we have seen is that the cycles are getting shorter over the last few years. Market expectations have been changing quite past in the last few quarters and hence the allocation to longer term bonds should not be ignored from a portfolio perspective.

Has the low-interest rate regime helped turn the tide in the favour of debt instruments?

The low-interest regime has been supportive of overall sentiment for bonds which led to both yields softening from levels prevailing one year back and higher amounts of bonds being issued in the last few quarters.

What are the challenges debt segment facing in attracting investors given the fact that other investment avenues are seemingly offering lucrative proposition?

It is recommended that investors maintain a disciplined asset allocation across business cycles and do not alter allocation based on immediate past performance and seemingly lucrative propositions. Investors have adopted a defensive approach to debt investments, reducing exposure to duration oriented schemes as the outlook has turned cautious. Investors could start adding exposure to longer term funds periodically with a medium term investment horizon.

Government bonds are now opened up for retail investors. How this will prove beneficial for the sector and do you have any plans for offering such products?

It is a great move to retailise the Government bonds market by making access easier for investors. Tax concessions could be considered to attract investor interest into government securities.

(Edited by : Abhishek Jha)