''With 6 months horizon, short term debt funds would provide better risk adjusted returns,'' says Akhil Mittal, senior fund manager, fixed income, Tata Asset Management.

In an interview with Varsha Inamdar of Myiris.com, Akhil Mittal said, ''We remain cautious on duration in near term and bullish in medium to long term. We would look to add duration to portfolio's (G-secs) in phased manner over next couple of months in long duration funds.''

Excerpt from interview Myiris had with Akhil Mittal:

1. What is your take on the current debt market scenario?

We expect long term interest rates to inch up a bit with RBI reiterating its stance against inflation and commitment to continue on disinflationary path. Post June Monetary policy review, market was anticipating monetary easing cycle to start soon, but with RBI making 6% CPI target of January 2016 as one of the goal posts, and sighting some near term risks, the rate cut or monetary easing cycle has been pushed further away.

We expect 10 yr (new) G-sec to trade in range of 8.50 to 8.70 in near term. Also, with start of easing cycle being pushed further, the shorter end of the curve is likely to underperform and we would see flat curve going ahead.

With credit off-take not picking up, there would not be too many issuances on corporate bonds side, hence corporate bond spreads might remain compressed for near term.

2. With a six month horizon, which segment of the debt market do you expect to deliver better returns?

With 6 months horizon, short term debt funds would provide better risk adjusted returns. With expected rate cut cycle being pushed further (we expect monetary easing cycle to start by next financial year), there would not be big alpha opportunities in long duration curve. Also, there are a few risks i.e. external risks wrt crude prices and geo-political risks, domestic risks like inflation (weak monsoon would push food prices higher) which can unfold and would make duration more volatile. Hence a short duration (2 years average maturity) would be an ideal investment strategy as one would get decent accrual on portfolio's along with some alpha from duration (back ended) if there is a rally at fag end of the year. 

3. What is you view on RBI monetary policy review?

RBI has reiterated stance against inflation and remains committed to continue on disinflationary path. RBI has clearly mentioned that it would want to see off some upside risks to inflation, and have more surety on achieving the medium term CPI target (6% by January 2016) before starting to ease the monetary policy.  RBI has reduced SLR and HTM limits by 0.50% each to help banks plan their credit off-take better (as and when it happens).

By doing this, RBI has pushed the expected easing cycle further away (market was expecting rate cut cycle to begin by last qtr of CY 2014) and has given more clarity on policy path (though the tight policy stance could last long).

We expect RBI to start easing cycle only by next financial year and this delay in rate cuts would make economy more inherently strong to face external shocks. We are bullish on interest rates with 2-3 year view but would see volatility in near term.

4. What is your investment strategy for debt products?

We remain cautious on duration in near term and bullish in medium to long term. We would look to add duration to portfolio's (G-secs) in phased manner over next couple of months in long duration funds.

We are bearish on corporate bonds as spreads are hovering at very low levels. The main reasons for low spreads are low issuances in last 3-4 months owing to changes in company law affecting issuance and low investment activity. As economic activity picks up going ahead, we will see credit demand picking up and spreads widening. Hence one might not make decent alpha in corporate bonds and corporate bonds likely to underperform government bonds on a medium to long term basis.

In short duration funds, we will continue to run lower duration with decent accruals and take tactical appreciation calls. We would remain invested in high credit quality corporate bonds as there is an inherent demand and reduces liquidity risk.

5. What kind of products would you advocate for people who are looking at fixed income kind of investing right now?

For investors with 2 years plus holding horizon, and appetite for volatility, long duration funds like G-sec funds, Dynamic Bond fund would be best suited.

For investors who have 2 year plus investment horizon with moderate appetite for volatility, Income funds (majority exposure skewed towards G-secs) would suit better.

For investors with low investment horizon, short term fund, lower duration income funds would be best suited.