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Long duration funds might give you 8-9% in long run, says Mahendra Jajoo, Head - Fixed Income, Mirae Asset

If investors want to invest, they should prefer SIPs over lump sum investments in long duration funds.

, ET Online|
Oct 03, 2019, 11.25 AM IST
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The 10-year benchmark yield has gone up by 50 basis points despite the last two rate cuts by RBI. Money market is nervous about the likely shortfall of funds for the stimulus announced by the government. Shivani Bazaz of ETMutualFunds.com spoke to Mahendra Jajoo, head of fixed income, Mirae Asset, to understand what is happening in the debt market. Edited Interview.

The money market is nervous about how the government is going to fund its stimulus plans. Yields are already up, what is in store for the money market?
As of now, the government has already said that it will maintain the fiscal deficit target in the second half of borrowing, but there are obvious concerns over shortfall in revenue. The government has indicated that it will do some divestment and there is already some extra dividend from the Reserve Bank of India which has kept the fiscal deficit under control so far on a proportionate basis. These are some of the open issues and we have to see how things go. There is some uncertainty over how this will settle and where the extra resources will come from. But at this point, it looks like the National Small Saving Fund and divestment will fill in the gap for the government.

There are concerns over the government overcrowding the money market by large borrowings. What is your view?
Obviously, there are concerns and that is why the yields are higher by 50 basis points despite the last two rate cuts. Market is pricing in some sort of an uncertainty in terms of borrowing numbers eventually. My sense is that as and when the liquidity tightens and RBI injects liquidity through open market operations, the market will find comfort.

Do you believe that hardening of yields and likely inflation pressures will prompt RBI to hold further rate cuts?
I think there is no inflationary pressure as of now. The consensus is that in spite of a slight increase in fiscal deficit, which is not expansionary, there will be no impact on inflation. It seems that notwithstanding the current shortfall in revenues or higher fiscal deficit possibility, RBI will still be in a position to cut more rates to support the market further. The only problem is that despite the rate cuts, the market yields are still going up. So, RBI has to bring in some liquidity measures, which would stabilize the market.

How many rate cuts do you expect in this financial year and the calendar year?
There is still enough room for rate cuts because our real rates are existing at 2.25 per cent and if the economy needs growth stimulus then the real rates need not be so high. The global market is also very supportive, so there is definitely room for further rate cuts. On a realistic basis I still consider 50 basis points for this financial year.

What is your view on the benchmark yield?
As I said, the market is already pricing extra supplies but in case that doesn’t happen or if RBI injects additional liquidity through open market operations, then eventually the 10-year yield should settle somewhere around 6.25 per cent.

Based on this yield view, what should be the debt mutual fund strategy?
I think the interest rate environment is still supportive. There is no reason to feel that rates should go up. The only issue is that there is an immediate concern of supplies. But I am sure that the government and RBI will take enough steps to dilute and moderate the fears in the market. As far as the yields are concerned, I expect them to come down because RBI will have control over the situation once they see a need for open market operations. Post that, things should settle down. I feel that the market is still positive. Debt mutual fund investors should stick to short to medium term funds.

Do you think that the party is over for long duration and gilt funds?
I don’t think the party is over yet in the long duration funds. If investors want to invest, they should prefer SIPs over lump sum investments in long duration funds. It is unrealistic to expect similar returns from these funds. Not to forget that an year back, nobody was talking about long duration funds. So, I feel that rather than trying to time the market through lump sum investments, the investors should take the SIP route. While the returns from long duration funds may not be 19 per cent but they might give you 8-10 per cent in the long run.

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Mirae Asset Large Cap Fund: Fund review

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Mirae Asset Large Cap Fund: Fund review

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