Tata Mutual Fund with assets under management close to Rs 5,500 crore has seen some of its schemes being ranked in the top quartile in the recent past, owing to their strong performance. Ved Prakash Chaturvedi, CEO, who leads the team at Tata Asset Management Ltd, spoke to Mahesh Nayak on the impact of some recent developments in the debt and equity markets and the outlook for the future. Excerpts: 

With rising inflation, how will investments in debt mutual funds shape up for the year? What returns can be expected from debt funds?
A rise in inflationary expectations, typically also leads to a rise in interest rates. This medium-term trend is unlikely to be positive for long-term bonds and long-term bond funds. Hence you would have noticed that over the past few months, the performance of long-term bond fund-oriented schemes has been below par. With this backdrop, it is expected that investors would look more at short-term-oriented bond funds, like liquid funds and short-term plans and adopt a more conservative approach. However, once the interest rate volatility plays itself out, it would be a good idea for investors to look at a move into longer-term bond funds, sometime in the future. 

What is your view on interest rates and the US dollar?
Interest rates ultimately reflect the cost of money in the system. When the supply of money is more than the demand for money, as has been the case in the past three years, interest rates typically have been seen to come down. Similarly, an environment where the demand for money is more than supply would create a situation where there would be an upward bias for interest rates. In line with the global trends and because of significant supply of money both from overseas and domestic sources and limited offtake of credit, the interest rate environment in India has seen a declining trend over the past few years.

However, globally and in India, the situation is now changing with expectations of higher inflation and hence interest rates. The large flow of overseas money into India also seems to have decreased a bit and there are some signs of increase of domestic credit offtake. All this would combine to create a situation where there would be an upward bias on interest rates. This would get reflected in domestic yields over a period of time. 

What should debt investors do at this point in time, when inflation-adjusted returns from debt instruments are negative?
Typically in an environment where there is an upward bias for interest rates, investors in long-term bonds and long-term bond funds are affected adversely. It is, therefore, advisable at this point of time to focus on short-term bonds or short-term bond funds as mentioned earlier. It should, however, be mentioned that in inflationary times typically equity markets tend to do well. Hence investors who have some appetite for risk can also look at a limited exposure to equity-oriented instruments for enhancing overall medium-term returns. 

In the short term, equity markets react to temporary news flow as well as sentiment. However, in the long term, equity markets react to the fundamental performance of the economy and various sectors and various companies in these sectors. It has been seen all over the world and in India in the past that long-term investors in equities typically benefit, provided they follow a proactive approach to investing and invest in high quality companies or equity funds. 

How do you expect the equity markets to perform going forward?
Notwithstanding the recent rise in oil prices and other news, which has had a consequent impact on equities, investors with a medium-term view and with appropriate risk appetite can look to invest in equities or equity-oriented funds. I would like investors to take a look at the performance of equity funds in India with a five-year timeframe. An examination like this can show that typically investments in equities should be made with a medium-term perspective and in the medium-term such an investment can outperform inflation. 

What should equity investors do at this point?
Our advice to equity investors always is to first understand their own risk return appetite. Investment in equities should be looked upon as a medium-term project. 

What path should retail investors adopt in the terms of asset allocation?
Retail investors are well advised to understand the risk-return appetite and only then decide on asset allocation. They should put away money, which is not required for sometime and with which they can take risk in equity or equity-oriented funds and the remaining should be put in safe liquid funds or short-term oriented bond funds at this point of time. Typically, it is said that ‘investors should invest 80 minus his age in equities and the remaining should be put in safe instruments.’ However, this thumb-rule can vary from person to person depending on their individual risk return appetite. 

What is your outlook for investment returns in the next two quarters?
Investors would be advised to be cautious in long-term bonds or long-term bond funds in the near future. However, in the debt segment, investments can be undertaken in short-term-oriented bonds or short-term-oriented bond funds. Our view of the market in the near future is sanguine based on the fundamental performance of companies in a cross section of sectors. However, the market may turn volatile towards the presentation of the next Budget and investors should keep this in mind while investing.