Chaitanya Pande, head-fixed income, ICICI Prudential Mutual Fund,

'Invest in funds that will mature in 1 to 3 years'

The magnitude of foreign institutional investor (FII) inflows in debt and equity is slowing down. But Chaitanya Pande, head-fixed income, ICICI Prudential Mutual Fund, believes that the slowdown in debt investments is because FII limits have not been utilised fully in India. He tells, what lies ahead this fiscal. 

What are your expectations from the Reserve Bank of India (RBI) on rate hikes?
We believe the RBI will most probably hike interest rates again, but that will be the last hike for a while. The subsequent RBI action can probably be easing liquidity which will happen in the next fiscal either in March or April through a rate cut or infusing liquidity.

Where should one invest in the current market environment?
The investor should go for funds which invest in 1-3 year maturity tenure. From November 2010 to April 2011 most investors pumped in money into fixed maturity plans (FMPs) which had a maturity in the range of 1-2 years. The 18 months FMPs are attractive even today. Most investors have a large chunk of their portfolio in FMPs already. So now it probably makes sense to consider some open-ended funds of a similar type.

Can you tell us about the products offered by your fund house that fit this category?
We have ICICI Prudential short-term plan, ICICI Prudential long-term plan and ICICI Prudential Regular Savings Plan. Regular savings plan is a pure retail fund because there is a cap of `5 crore per investor.

Are you advising investors to look at long-term funds?
No. But there is a category of investors who has the risk appetite or the volatility appetite with at least a 2-3 years holding period. Such investors can start putting some incremental money over the next 3-6 months into income funds.

What is your outlook on short-term rates for the remaining part of this fiscal?
The economy looks to be slowing and banks are seeing a slowdown in the incremental borrowing. So if that is happening I do not see why rates should move significantly by March. For a brief while we may see a spike in short-term rates, but that will be a temporary one.

How difficult is it for debt fund managers to give positive inflation-adjusted returns?
It is difficult. But I am not very convinced that you can look at today's inflation and expect returns based on it. By that logic you should have bought it last year. Now, we need to see what inflation will be for the next one year. My expectation is that inflation will come down dramatically. I am not too convinced that debt should give you better returns than inflation. Over a long period of time debt will just about meet inflation. If you want inflation-adjusted returns to improve, you need to add some element of higher risk by looking at either hybrid funds which has some amount of equity built in or other asset classes.

Chaitanya Pande

The pace of downgrades is increasing and that of upgrades is decreasing. In such a scenario, what are the challenges for fund managers?
We do not go solely by what rating agencies say which means all papers rated AA- are not the same. Similarly, all AAA papers are not the same. We normally do not buy assets below AA- for most of our funds. Downgrades are happening mostly in below AA- papers. We believe that if you look at safety and liquidity, returns will certainly follow.
FII investments have been badly hit in debt and equity. What is your outlook in debt?
I think FIIs still have a reasonable investment in debt. The slowdown in investments is because FII limits have not been utilised fully. Right now, the traditional long-term investors are not really present in India when it comes to debt market.