Anupam: Hi Listeners, we at Aditya Birla Sun Life Mutual fund have come up with a special podcast series called MF 101 in collaboration with Bloomberg Quint. MF 101 is an informative series that will help you understand the recipe behind mutual fund investments and what’s more? It’s coming from the chefs of the mutual fund buffet table. From the very own fund managers and analysts who are the manufacturers of the funds that help you realize your investment goals.

I’m your host Anupam Gupta, B50 on twitter and in this episode, we are going to discover the recipe behind Diversity in debt funds from our guest chef Kaustubh Gupta who is a fund manager at Aditya Birla Sun Life Mutual Fund. Kaustubh, Welcome to the show! Thank you so much for doing this for us. Tell us something about yourself to Listeners.

KAUSTUBH: Straightaway, I started my career in ICICI Bank, I completed my Chartered Accountancy in way back 2004. I was a ranker All of India and Fortunately after 2 years I got a chance to move to the Dealing Room and where I started trading markets as my first-hand experience three years, I spent there so total five years’ experience in ICICI Bank and then last ten years I have been with Aditya Birla Sun Life Mutual Fund as a fund manager.

Anupam: So, you see debt market really close from corporate desk, from treasury market desk. You have a feel of the debt market quite different from the stock market, right? I mean in the stock market our listeners already know the kind of mutual funds schemes that are there large-cap, mid-cap. Debt funds are fundamentally different right? So, let’s start you know explaining the broad categories of debt funds which are there.

KAUSTUBH: Yes, of course Anupam. What SEBI has done clearly is that they have come out with categorization guidelines. The basis fundamental for this categorization is of course duration and another is the risk profile that the funds are investing in because these are broadly risk that debt fund is exposed to. As far as duration categorization is concerned, I would classify broadly into five categories. The first one is overnight and liquid funds which invest into 0-90 days maturity. The second one is on the shorter and ultra-shorter funds which invest between 3 months to 1 year. The funds which are in this space is ultra-short-term funds, slow duration funds and money market funds. The third one is in predominantly in corporate debt funds. There are three kind of funds the first one is corporate bond funds, the second one is Banking PSU funds and the third one is of course short duration funds. These funds invest into 1-3year corporate bonds which are issued by high rated companies and the fourth category is on the longer end of the curve of the interest rate which are medium to long term which invest 4-7 years and long duration which invest in 7 years and above duration profile. On top of it the fifth one is a dynamic bond fund which is all seasons fund. The beauty of this fund is that it can invest across duration from 0 to what I would say someone who wants to take it, and this is actually being dynamic and all-season fund being its name attached to it the all kind of flexibility is being provided to this particular category.

Anupam: Okay! Just for the benefit of our listeners papers like you have been saying that they can invest in papers that is actually something that is issued by a company that mutual fund buys so can you just explain the concept of a paper. So, it could be a bond, it could be a CP or a CD or anything. So, what are these papers?

KAUSTUBH: So, these papers when I am talking about are tradable papers where investors can trade in and out quite frequently. Broadly they are classified into three categories. The first one is a money market which includes CDs and CPs, the second is the NCDs which are bonds which are issued both secured and unsecured and structured instruments by various companies and the third category which is sovereign papers which are issued by the government both state and central.

Anupam: Kaustubh so you explained to our listeners about debt funds across the time duration like short term all the way to long term there is one more way of categorizing debt funds which is the type of paper they invest in. Can you tell us something about that?

KAUSTUBH: Look on the other hand SEBI has broadly as I told you the inception in 2 categories that SEBI has given the classification - The first one is the duration and the second one is the kind of paper we are investing irrespective of duration. Now there are three broad categories first one is the corporate bond fund or corporate papers. I would say it has broadly two restriction the first one which is corporate bond fund which invest up to at least 80% of the paper has to be in at least AA+ and above and the second category in that is Banking and PSU funds which invest at least 80% of the corpus has to be in Banking and PSU papers or NCDs which is issued by these entities. The second category is sovereign papers funds like sovereign funds, gilt funds they do invest in these papers. Here the rating profile is since they are being issued by the sovereign entity like government both state and central. So, the rating profile is sovereign, and the third category is the credit funds which invest at least 65% of the portfolio has to be invested in AA and below.

Anupam: Okay! I keep on hearing AA, AAA, A, B, C, D and for our listeners. So, see two of us know that these are credit ratings it should be credit rating companies to companies and based on that rating the mutual funds buys and sells. So, can you tell us what exactly a credit rating and how it varies across the spectrum.

KAUSTUBH: It’s like the way we identify the quality of the paper or the quality of the issuer. It’s in a way there are third parties which I would say there are third rating in different agencies which do come to the markets and all these issuers who wants to issue puts money markets and corporate bonds. They go to them and like auditors they do a third-party check and basis their financial, basis their various parameters. They identify what is the probability of default and loss given default and they give rating profile. Of course, it moves all the way from AAA to D. AAA being the highest rated they are considered to be the safest both in terms of liquidity and in terms of the probability and the loss given default and D is more like junk grade and D which are near to default category. The good thing is that most of the investment which is done by the mutual funds I would say 80-85% of these investments they are pre-dominantly between AAAs and AAs of the world. And that’s why the credit profile, of these mutual funds is quite solid.

Anupam: There is one product which I have heard a lot about, which I keep hearing a lot about called fixed maturity plan, an FMP. What kind of a debt mutual fund is this?

KAUSTUBH: Usually India invests in traditional instruments because they are considered to be safe although they are illiquid because once you lock in rates you have to stay with them incase you break them you have to pay them penalty.

Anupam: Penalty in the form of a lower interest rate.

KAUSTUBH: Yes of-course Penalty in the form of a lower interest rate which is card rate prevailing at the time you have locked the rates and what we have seen is that traditional instruments they generally end up delivering low real returns to the investors.

Anupam: When you say real returns just so that listeners can understand real returns is equal to?

KAUSTUBH: It’s equal to normal return minus the actual inflation or realized inflation that investors have experienced over that period of time. Actually, your earning is the real rate because inflation usually everything get inflates and especially in the developing market like India Inflation is quite normal and it is quite volatile. So, real rates they are actually very much important from savers perspective.

Anupam: Which means for example I take an FD at 5% and inflation is at 6%

KAUSTUBH: Yes, then actually you have not earned anything

Anupam: So, the real rate is negative 1%.

KAUSTUBH: Negative 1% effectively which means that you have lost 1% for the period you have taken this particular whatever instrument you are investing in. You generally publish what kind of asset allocation tables and most of the investments are in the instruments which are highest rated. Of course, they are tax efficient because you invest in them for three years and you get a taxation advantage from that perspective. So, in nutshell I would say that investors just for the sake of diversification only they need to look up on all these maturity plans and they have to move from the historical way of investing whatever savings that you have. I am hopeful that with the financialization of the savings and as the word of spread reaches to last mile these instruments will take precedence and being these instruments, they are more driven by the market rates and the forces which I would say is because markets generally end up finding what is the true value should be, the investors will be ending earning better.

Anupam: Okay Kaustubh so we have spoken about the kind of debt mutual funds and even FMPs. Let’s in this last part of the podcast lets get to specific things. What is your outlook on 2019 given the kind of year 2018 was?

KAUSTUBH: One needs to understand that backdrop year coming into 2019. So in 2018 I would say it was the year when we started with a theme of synchronize global growth although at a lower level and which resulted into higher commodity prices, advanced economy central bankers especially US moving fast to normalization of their policy rates, quantitative easening turning into quantitative tightening and as year progressed we saw lot of outflows from emerging markets moving to developed markets and tight liquidity conditions everywhere. Globally and locally, locally in 2018 we saw a very low inflation friends and surprise policy makers largely driven by food prices and even the growth was much lower than policymakers saw at the start of the year. However, in the last two months I think the things have changed completely as far as higher commodity prices concerned which is the preliminary reason that India started scaring that inflation would come back, the crude prices, the energy prices which is the driver of Indian inflation it has corrected quite a lot. The central bankers which were quite hawkish till September they have changed their tone in line of new date and now market expect they will be far more neutral from here on. Resultantly I think in 2019 of course globally we could see some kind of slow down but locally the inflation trends which were quite low in 2018 they started reverting especially food inflation which is running quite ultra-low levels will start reverting and thus we see inflation moving back to 4-4 kind of range. Local growth we expect 2019 to be quite better as compared to 2018. As far as liquidity is concerned 2018 was a very tight RBI has acknowledged it in its last policy. They are moving pretty fast on making it more from neutral level. They have already announced extraordinarily large home loans we expect it to continue till March as communicated by RBI and thus we see that rates may remain neutral. But the regulatory conditions and the liquidity conditions to improve better from the markets here on.

Anupam: Lets get down to the actual call to action actual stuff that our listeners can do with debt mutual funds. Tell us how a newbie investor should choose a debt fund for his investments?

KAUSTUBH: As far as financial assets are concerned investors usually look up and equity as an asset class from their financial saving and rest of the savings if you see as far as the official data is concerned is usually has gone to the traditional deposits market or real estates or gold. I think the debt funds the time has come for them as the financialization is spreading out they may not be I would say ignored class and would need special attention at least from the sake of diversification it needs for the investors to have debt funds in their portfolio from the investment perspective. SEBI, I think is way ahead of its time and they have already categorized the investment into two broad categories as we just discussed basis duration and little bit on the credit profile. So, for investors evaluating the choice of instruments I think they can go to any AMCs and basis the risk they want to run and little bit of financial advice from their financial advisors they can choose which categories they want to invest in. But for the starters at least I should say they should start looking on at least from liquid fund and the shorter end of the curve which is ultra-short-term fund money market fund corporate bond funds as I would say is a good starting point.

Click Here to Check - What are Ultra Short-Term Mutual Funds?

Anupam: Fantastic! Folks that is a wrap on our show. For more such interesting know how’s continue listening to our Podcast MF 101 or simply follow the blog page of Aditya Birla Sun Life Mutual Funds, Bloomberg quint, IVM podcast or wherever you get your podcasts from. If you have any queries or some specific subjects you want us to talk about, with regards to mutual fund investments, reach out to us on our Twitter handle @abcabslmf. Thank you for listening to this podcast!

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The views and opinions expressed herein are personal and do not necessarily reflect the views of Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”). ABSLAMC/ the Fund is not guaranteeing/offering/communicating any indicative yield/returns on investments.”