-->
Back to insights

Investment Insights

Suyash Choudhary

The RBI Surprises

By: Punam Sharma

The RBI surprised all today by cutting repo by 50 bps to 6.75%. It has also given a medium term road-map for expanding FPI limits in government bonds. Thus FPI limit in central government securities Will be raised to 5% of outstanding stock and in state government securities to 2% of outstanding stock by March 2018. This will open up INR 1,20,000 crores and INR 50,000 crores respectively in central and state government securities, to be distributed evenly across quarters starting the October quarter. Furthermore, banks’ HTM limits are to be rationalized to 21.5% in line with SLR ratio starting the fortnight of 9th January 2016. Thereafter both ratios will be cut by 25 bps per quarter till March 2017.

 

Impressions

 

Instead of focusing on verbatim commentary, we are instead laying out our broad impressions from the policy.  The takeaways embedded are very important in our view:

 

1. The biggest driver of the move today seems to be a recognition of the marked deterioration in the global outlook for growth and its possible feedback loop to India. There are specific worries around weakening growth prospects in emerging market economies (EMEs) and the fall in world trade volume growth below world GDP growth. This fits well with our own analysis of the global and local macro environment as detailed in our note “The Seven Year Itch…And Investment Implications”, dated 2nd September. Given that India no longer runs an external funding risk (our CAD plus net FDI is now a positive number), the central bank had the luxury to respond to the growth risks without worrying about excessive currency volatility. Indeed, the rupee has strengthened post the rate cut.

 

2. There is clearly a sense of greater co-ordination with the government that comes out. This is most apparent in the RBI’s future inflation assessment which shows an average of 5.5% in FY 17, moderating to 4.8% in Q4 of FY17. This is a strong reaffirmation of government’s food price management as well as the future fiscal stance, alongside an embedded view of a prolonged global commodity price slump. What we find particularly encouraging is the prognosis for the future fiscal stance since the next year will have to incorporate a rise in revenue spending on account of the 7th Pay Commission as well as from the recent One Rank One Pension. Importantly, the RBI caveats these spending risks by saying that the government has reaffirmed its desire to respect its fiscal targets and improve the quality of its spending.  The increased co-ordination between the government and the RBI is further affirmed by the press conference done by the finance minister just after this policy as well as both committing to work towards improving transmission of rate cuts.

 

3. The RBI continues to be flexible with the ‘real rate’ framework. This had started as a 1.5 – 2% real rate ‘target’ of repo over CPI. It evolved to the same real rate applying to what a 1 – 1.5 year saver would earn (presumably the fixed deposit rate for that tenor). In between there was also some reference to tax adjusted returns to savers. It seems to have finally settled on the 1 year treasury bill as being the anchor. Thus at 5.5% average inflation forecast for the year ahead and assuming a 1.5% real rate target, Rajan is quite rightly assuming that 1 year treasury bill rate will settle around 7% with a repo rate of 6.75%. Thus, he is maintaining his real rate band while also signaling that policy rates may be on hold for some time. This is further reaffirmed by him saying that the policy focus will shift towards ensuring transmission into lending rates.
4. However, importantly, the policy is still accommodative and open ended (unlike a ‘hawkish’ cut that some were expecting) and there still may be more easing ahead over the course of the next year. The most likely trigger for this easing could be a further deterioration in global growth and trade prospects and / or CPI undershooting RBI’s average forecast of 5.5% for the year ahead. For the record, the total inflation ‘build-up’ in FY 15 was 5.16% (build up refers to the sum of month on month changes for the whole year and better reflects actual inflation since it completely strips out base effects). In the current financial year, we are so far tracking 71% of the FY15 build up. So there may be room to undershoot the average forecast of 5.5% that RBI has put out for FY 17.

Implications

 

At the time of writing, the 15 year actively traded government bond is still dealing 100 bps over the repo rate of 6.75%. This is an attractive term spread given two things:

 

  • Policy still remains open ended even though there may be a near term pause. We have repeatedly pushed against a ‘closed ended’ rates framework given the unusual level of global growth uncertainties and the fact that local policy response to inflationary pressures have been continually evolving. The same holds even now, especially in light of the recent further turndown in global growth prospects.
  •  

  • The increase in FPI limits will ensure that an additional source of demand for SLR assets to the tune of approximately 10% of additional supply emerges over the next 2.5 years. This further improves the demand –supply dynamic over this time period.

Given the above, we think long term bond investors should hold on to their asset allocation to active managed duration oriented products. We would hence reaffirm the portfolio themes we had detailed in our recent note “Portfolio Implications of This Long Macro Cycle”, dated 9th September.

 

Disclaimer:

 

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

 

The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

Tag:

Suyash Choudhary

This note is a continuation of our previous one (please refer “ The Seven Year Itch…And Investment Implications”, dated 2nd September for details). Briefly, the points we had made in that note are as follows:

 

  1. 1. An economic cycle typically follows a ‘boom-bust’ sequence where capital misallocations made towards the peak of the boom phase get cleaned out by the bust. However, the global policy response to the 2008 crisis ensured that the bust phase did not play out and that the underlying theme of capital misallocation continued, albeit in different ways.

 

  1. 2. US policy response helped create a worldwide chase for yields creating potential portfolio risk. China threw a fresh investment stimulus over an already maturing investment cycle, thereby helping build a capacity risk. India responded via an outsized consumption stimulus in a supply constrained system, thereby pushing real interest rates into deeply negative territory and fuelling a funding risk. To our credit, we have aggressively rebalanced away from this since 2013. However, some other emerging economies have failed to make this rapid an adjustment.

 

  1. 3. Domestic growth can be looked at today as responding to three triggers or ‘multipliers’: a> government’s attempt, with potential help from private capital, to jumpstart an investment multiplier b> banks’ inability to create a meaningful credit multiplier ahead c> the continued weakness in global trade.

 

Given this global and local backdrop, it is unlikely that we see a sharp cyclical recovery in the next few quarters, even as medium term growth prospects may look better if the government succeeds in creating a meaningful investment multiplier.

 

In light of the above, there are three distinct portfolio themes that investors should look at, in our view:

 

  1. 1. A core portfolio of sovereign bonds: There are three fundamental reasons to be bullish bonds: a> attractively valued real yields (almost 3% assuming inflation is averaging towards 5%, which is  our view) b> narrowing gap between demand and supply of financial savings or closing out of India’s funding risk (this argues for lower ‘equilibrium’ rates  and is exactly the converse of what happened to us in 2013) c> lack of a strong cyclical recovery (which implies a long period of tepid credit growth and low inflation). There is also a reasonable chance that global deflationary forces get even stronger. One probable channel this could happen via is incremental stress on offshore private sector leverage that has been built in emerging markets over the past few years. If indeed these forces strengthen, the first impact on Indian bonds may very well be negative via the portfolio channel as foreign investors rebalance exposures. However, the important point here is that India no longer runs a funding risk. The clearest measure of this is the so called ‘basic balance’ defined here as  the sum of our current account deficit and net foreign direct investments. Thus basic balance for India has swung back into positive, in stark contrast to FY 13 when it was negative to the tune of almost USD 70 billion. This means that we now no longer need net new foreign portfolio money or debt to finance our external account on an annual basis. Hence in case of a deflationary fear induced global volatility, the RBI need no longer focus on the funding risk that such episodes can potentially create. In fact, if such forces further help the local disinflationary impulses then the RBI’s bias to ease policy may in fact get stronger; once the dust settles. All these argue for a core portfolio of long sovereign bonds, most likely best executed via active managed duration oriented funds. Of course, such investments may be volatile on a daily basis even though medium term outcomes may look very different. For that reason, what proportion of a portfolio goes into this core strategy is best left to individual risk appetites.

 

  1. 2. Minimal exposure to credit risk: Credit risk here is meant not as everything that is non sovereign. Rather it means the active deployment of credit risk as a strategy with an objective of earning ‘excess’ returns. What we must also clarify is that the view here has nothing to do with a recent episode of company stress that has come to light. Rather, our view is basis two large reasons: a> Credit risk in India inherently cannot be hedged on a continuing basis given the lack of a robust secondary market and non availability of hedging tools. Hence, if assumptions made at point of investment change, unlike duration risk that can be cut, there isn’t much the fund manager can do about credit risk unless safeguard covenants have already been built into the bond itself. For this reason it should never be a dominant part of any investment portfolio, in our view. b> Additionally, there are significant headwinds to credit risk in the current phase of the global and local macro-economic cycle (please see our note “The Macro Reason To Reassess Credit Risk”, dated 19th August for details).

 

  1. 3. Focus on minimizing reinvestment risk: In an environment of low inflation where gap between demand and supply of financial savings is falling, one can reasonably look forward to a long period of lower interest rates. This means that, unlike the period between 2009 and 2013, one’s maturing investments may not get the same reinvestment rate that they got invested at initially. This is the clearest reason to elongate maturity on new investments. Another way to look at this is as follows: if expectation is that rates are going to fall ahead, then the ‘1 year rate 1 year from now’ should be lower than the current 1 year rate. However, today 2 year rates are higher than 1 year rates by almost 20 bps. This means that the 2 year rates are implying that 1 year rate 1 year from now will be 40 bps higher. Obviously this is the case because demand and liquidity in 1 year rates is much higher than in 2 year rates. However, for the medium term investor this could reflect an opportunity to buy 2 year rates rather than 1 year. This makes another point related to point 1 above. If some investors have a limited appetite for a large core portfolio of sovereign bonds owing to daily volatility in that investment, they can allocate a higher proportion to 2 – 5 year intermediate bond products; provided these funds take very low credit risk. This will help hedge against future reinvestment risks.

 

Conclusion

The current global environment is extremely volatile and dynamic. The attempt here has been to describe our framework for the underlying macro cycle which helps explain some of the developments that we are seeing in the environment today. The attempt also is to lay down basic portfolio principles which in our view are consistent with our interpretation of this global and local cycle.

 

Disclaimer:

 

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

 

The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

 

Tag:

Suyash Choudhary

The Hypothesis
 
It is often useful to think in terms of overall economic cycles. This is because if cycle turns can be broadly gauged and portfolio allocations aligned accordingly, it may have significant implications for long period returns. In the present case, the hypothesis here is that we are still in one long drawn global economic cycle that potentially started with the policy responses to the global financial crisis of 2008. In theory, flashpoints like the 2008 bust are triggers to clean up capital misallocation wherein ‘bad’ capital is allowed to fail whereas ‘good’ capital goes on to earn supernormal profits. However, it can be argued, the global capital misallocation cycle continued post the 2008 collapse. The ‘too big to fail’ hypothesis and the possibility of a self sustaining spiral that such failures could potentially create alongside long period deflationary risks, prompted US policy to largely backstop the bad capital overhang of the previous leverage cycle. Elsewhere in the world, policy carried forward its own version of capital misallocation. Thus, for instance, China threw a large investment stimulus at the problem and continued creating capacity even amidst visible signs that local demand was slowing. India policy created a large consumption stimulus in a supply constrained system. Versions of this happened in other economies as well, but we will keep the illustration here limited to these three economies.
 
The Manifestation
 
The continued capital misallocation has manifested, among other ways, in the following fashion:
 
1. US cycle stabilized but many argue that economic disparities have grown as largely only asset market exposure has generated wealth. Furthermore, and more relevant for the rest of the world, the long period of liquidity glut helped fuel large rises in private corporate debt across emerging markets. This would have potentially gone well had US succeeded in re-creating a robust global trade multiplier. But given that the world still stares at a demand scare, ironically at the cusp of US monetary policy reversal, the risks from the rise in leverage have got exacerbated. The dollar strength attendant with relative US growth and potentially divergent monetary policy has added to the stress. Note that the stress here can be looked at either from the investor’s perspective (allocators to assets outside US who are suffering from value of investments getting eroded owing to funding currency’s relative strength, as well as investment credit spreads rising) or the ‘issuer’s’ perspective (cost of repayment rising owing to relative strength in borrowed currency). Hence the US monetary policy conduct, followed now by Euro-zone and Japan, can be argued to have created a potential portfolio risk.
 
2. China continued to grow capacity in the face of slowing internal demand. This is now manifested as huge excess capacities and falling commodity prices. The commodity collapse is exacerbating pain for traditional commodity exporting countries that had been hitherto binging largely on Chinese demand. These countries are now facing capital outflows and depreciating currencies leading to inflation (ironically alongside collapsing growth) and company stress (via lower revenue realization as well as rising debt service cost). Thus the risk described above as ‘portfolio risk’ is doubly potent for such countries. China itself is struggling to rebalance. At any rate it cannot create demand at anywhere close to the pace required to absorb its excess capacities. When assessing risks for the world, this can be termed as a capacity risk.
 
3. India pushed itself into deeply negative real rates. Inflation spiraled as stimuli was thrown into a capacity constrained system. This manifested in a built up of funding crisis which reached a flashpoint in 2013. Hence India created for itself what can be called a funding risk. However, India has rebalanced well since the 2013 lesson and is justifiably spoken of now amongst the top few emerging markets. To that extent, we have significantly alleviated our funding risk which may have very well existed today had two things not happened: the taper tantrum because of the wake-up call that it provided, and RBI’s adoption of flexible CPI inflation targeting. However, given that we could mitigate our funding risk earlier, we are facing much lower risk in the current environment.
 
The Implications for India
 
This can be looked at in two parts.
 
1. Basic macro- economic stability: As has been well recorded and also discussed above, post the taper tantrum India has taken a series of very important institutional steps to plug our funding crisis. RBI’s monetary policy framework and government’s approach towards administered prices have clearly been two very significant developments. As a result of these as well as some global benignity, we now have real positive interest rates and well behaved inflation, lower current account deficit and neutral to positive ‘basic balance’ (current account deficit + net FDI), lower fiscal deficit and re-routing of spending into capital formation, etc. So we can better withstand a potential portfolio risk referred to above. Also, the ‘capacity risk’ described above is partly affecting us positively via our status as a net commodity importer. However, the other dimension is slower global trade and that is also harming us. Moreover, falling commodity prices is definitely credit negative for certain sectors of the economy with the attendant credit risk that this implies for already stressed bank balance sheets.
 
2. The prospects for growth: Basic macro-economic stability should obviously entail better relative growth. However, it is not immediately evident why absolute growth should also be spectacular, and especially in the short term. In our view, there are clearly three push and pull factors that seem to be at work with respect to domestic growth prospects. Two of these are currently working negatively, and one positively. These are listed below:
 
a. Credit: The stress underway in the banking system is well documented. Apart from capital constraints in context of asset quality pressures, there is a real need to diversify in favor of retail lending; which by definition is smaller ticket size. This argues for a continued weak support to growth from the banking credit multiplier. Historically it has been hard to envisage a robust economic growth cycle in absence of significant ‘loan capacity’ from the banking system. This may be partly getting mitigated now due to funding sources being diversified towards local and global capital markets.
 
b. Trade: Global trade has been weakening for some time. The latest phase of panic in asset markets coincides with a further leg down in global trade and anticipation of continued weakness. Again, historically periods of strong domestic growth have been concurrent with rise in global trade activity.
 
c. Investment: To its credit, the present government has acted quickly to create a direct investment multiplier. They have used savings from commodity prices to enhance public capital spending. As multiple researches have calculated, public investment has one of the strongest future growth multiplier. However, the quantum that can be incrementally channeled via the government’s own finances is simply not enough. Again to its credit, the government seems well aware of this and hence is working on creating conduits for other sources of funding including via domestic public enterprises and institutions as well as foreign capital. However, the actual flow of funds via this route is yet to happen meaningfully.
 
Given the above, it is hard to reconcile with the emphatic view of a strong cyclical recovery that has been forthcoming from many quarters. Certainly a bull case can be made where the investment multiplier as described above becomes self sustaining and becomes the dominant force for India’s recovery. However, at best it will be slow to materialize over a period of time and is not consistent with the prognosis of ‘V’ or ‘U’ shaped recoveries. In the bear case, credit continues to stagnate as banks struggle to get a lid over asset quality stress and / or the drag from global trade persists or indeed accentuates.
 
Conclusion
 
Whichever way this ultimately goes, there is simply not enough data right now to make an emphatic call on a cyclical recovery. This is because one cannot be certain how much stronger or weaker the individual drags mentioned above can potentially get; especially as the global economic cycle as described above is still far from resolving itself. As an example, the global swoon post the recent Chinese devaluation seems to indicate that at least in the short term markets are fretting about further collapses to the trade multiplier. Meanwhile, investment risks need to be managed. It is in this context also that we have been talking about the manageability of risks in fixed income (please refer our note: “Managing Risks In Investments: Credit Vs Duration”, dated 31st August for details).
 

Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

Tag:

Suyash Choudhary

Introduction

 

Investment decisions are mostly made on the basis of expected returns. However, the delivery of these returns is based on taking and managing certain risks. These are, then, two sides of the same proverbial coin. However, in the ‘bull’ phase of an asset market, focus is mostly on the expected return from the asset class. Whereas when the phase turns the focus turns as well to the potential risks and how they can be managed. Now it is readily apparent that for the long term portfolio investor this alternate realignment of focus on reward then risk and then back again is sub-optimal and may entail significant impact costs. Two such types of impact costs come readily to mind: One, there is a leakage in realized returns when switching from ‘chasing’ expected return to ‘chasing’ risk aversion. Two, there may be a taxation impact as well as for instance in the case of what fixed income investors lose now for a time horizon of less than three years.

 

It is thus much more optimal if a fair assessment of risk versus return trade-off embedded in an investment strategy is made at the time of investment. Of course, this is easier said than done since by definition the assessment of expected return must be higher than potential risk at the time of investing, else the investment wouldn’t have been made in the first place. Also, some of the assumptions underlying the initial assessment of risk versus reward trade-off may themselves undergo a change. This is especially true in context of the current global environment wherein both international linkages and the dynamism inherent in these linkages are arguably higher than they have ever been in the past. Given this, a better trade-off to focus on is the expected return versus manageability of risks taken in pursuit of those returns.

 

Assessing Manageability of Risks

 
There are two legitimate risks that investors can take in fixed income in order to endeavor to earn more than the ‘risk free’ rate: Duration risk and credit risk. The former works via a daily mark-to-market channel and hence offers more short term volatility in return profile (although the longer term profile may actually be much more stable). The latter works more as a binary risk, it either manifests or it doesn’t. This is especially true in a market like ours where there is hardly any secondary market price discovery for lower rated credit assets. Thus change in credit quality doesn’t get dynamically reflected in price changes.

 

Now consider these risks from the perspective of manageability. At the point of investment, when either of these risks is first assumed, the fund manager makes a due assessment of the risk versus reward trade-off. Only when the trade-off seems favorable does the risk get initiated. This goes without saying and should be true for any rational decision maker even if the quality of decision making itself (or the relative assessment of risk versus reward) may depend upon the strength of the research process, experience of fund manager, etc. It also goes without saying that once a risk is assumed, it gets monitored on a regular basis for evolving developments and / or change in view.

 

The difference really lies in the ability to respond in terms of curtailment of risk if the view changes on evolving developments. In the case of duration risk since the underlying market is active and frequently traded, the risk can be managed on a continuous basis. Thus when investors worry that investment horizon is now three years and what happens if view changes in between, the worry may not be material so long as the underlying duration fund has an actively managed philosophy. An actively managed fund will cut duration if the view changes. Therefore, the investor’s risk here is not the inability of the fund manager to address the risk but rather that the fund manager’s view itself turns out to be wrong. Whereas in the case of credit risk there is neither any meaningful secondary market for lower rated credits nor the means to hedge risks via a well functioning derivative market. Hence there is little that can be done on an ongoing basis to address an evolving view of risk versus reward. Of course, the bond itself may have covenants in place that may provide a safeguard. However it may be borne in mind that unless the covenant diversifies risk to a third party and is not exclusively linked to the issuer itself, it may mean little in a time of extreme stress.

 

Conclusion and Summary

 

Credit and duration are both legitimate risks undertaken in pursuit of ‘excess’ returns. The point we have continually pushed against over the past few years is the propensity to only consider duration as risk and credit as ‘accrual’; simply because duration manifests itself continually via daily volatility whereas by its very nature credit risk doesn’t manifest itself regularly, especially given our relatively illiquid secondary market. An added point that we have been making lately (please refer our note: “The Macro Reason to Reassess Credit Risk”, dated 19th August for details) is that unlike in the period starting 2009, credit risk is facing significant headwinds today. And given our view that a strong cyclical recovery in nominal GDP growth is unlikely in the foreseeable future, we think these headwinds are here to stay. Hence, we have argued that the current point in the macro-economic cycle suggests that investors should prefer duration over credit risk.

 

The current note brings out an added disadvantage that credit risk suffers from in a market like ours: once undertaken, and unless mitigated by direct covenants in the deal itself, credit risk cannot be managed on a daily basis like duration risk can. A summary of key points made here is as follows:

 

1. Long term investors have to focus on both expected return as well as risk when investing. This is because there can be significant costs to intermediate period re-balancing.

2. Since this trade-off can always change with changing triggers, the focus should be on expected return versus manageability of risks taken.

3. Duration risk can be managed on an ongoing basis since it is backed by a robust secondary market where one can buy and sell.

4. The same is not true for credit markets which makes the ongoing management of the risk difficult.

5. The current phase marks significant macro headwinds to credit risk and hence makes the focus on manageability of risk all the more relevant.
 

Disclaimer:
 
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
 
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable, as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

 

Tag: