Mr. Bhupesh Bameta

Portfolio Manager - Debt, Aditya Birla Sun Life Mutual Fund.

Mr. Bhupesh Bameta is a Fund Manager and Economist with Aditya Birla Sun Life AMC Limited. He brings with him an overall experience of 17 years in the financial services industry, and joined ABSLAMC’s Fixed Income Investment team in December 2017.Prior to joining ABSLAMC, he was the Head of Research in Forex and Rates Desk at Edelweiss Securities Limited, covering global and Indian forex markets and economies. He was also associated with Quant Capital for 6 years as an Economist and was covering Indian and global economy and markets.Bhupesh is an Engineering graduate from IIT-Kanpur and was All India Rank 1 in Graduate Aptitude Test in Engineering (GATE).

Please note we have published the answers as it is received from the Fund Manager of Aditya Birla Sun Life Mutual Fund.

Q1. The repo rate has been held at 5.25% for four consecutive meetings. What is your view on interest rates from here, and what are the key factors investors should watch over the coming months?

Ans: We expect one 25 bps rate hike in the current year, taking the repo to 5.50%. Key monitorable are progress of the US Iran war; outcome of the monsoon; and the US Fed rate hike decisions.

Q2. The rupee has weakened past ₹95 to the dollar this year. What is your view on the currency from here, and what are the key factors that will drive its direction?

Ans: While the rupee has staged a modest recovery following the successful rollout of the FCNR(B) scheme, we are unsure about the prospects of a meaningful appreciation in the near term. The backdrop remains challenging, with expectations of monetary tightening across developed markets strengthening the dollar's appeal, persistent uncertainty around the AI-led investment cycle influencing global capital allocation, and disruptions in crude oil supply chains keeping energy prices volatile. These factors are likely to constrain sustained currency gains. Hence, we expect the INR to remain broadly range-bound, hovering around ₹95/USD, until greater clarity emerges.

Q3. Several platforms are currently offering bonds with coupon rates ranging between 12–14%. What questions should an investor ask, or factors should they evaluate, before investing in such high-yield bonds?

Ans: As a thumb rule, the higher the coupon rate of a bond, the lower is its credit rating. And the lower the credit rating of a bond, higher will be its default risk and lower will be its liquidity. While the OBPPs are offering such high yielding bonds, they hardly have any secondary market liquidity or in other words they are buy and hold instruments. An investor who is willing to buy such bonds should reflect if he is okay to assume that level of risk for the whole term of the bond and how he will exit his investments should a default risk unfortunately arise.

Q4. Investors often focus on interest-rate risk when evaluating debt funds, but what is reinvestment risk? Why can falling interest rates actually create a challenge for an investor who is dependent on regular income from fixed-income investments?

Ans: Reinvestment risk is another form of interest rate risk where the portfolio manager has to reinvest proceeds from the sale or maturity of any bond held in the portfolio at a lower rate of interest than it is today. Since the future trajectory of interest rates is currently unknown, reinvestment risk might have the effect of lowering your overall returns.

Change in interest rates in the economy largely influences the overall returns from debt funds because the underlying bond prices and interest rates move inversely to each other i.e., when interest rates rise, bond prices fall and vice versa.

Q5. Overnight funds invest in securities with a maturity of one day, making them structurally different from most other debt-fund categories. For an investor with a short-term cash requirement, what should they understand about the return potential, risks and appropriate use of an overnight fund compared with a liquid fund?

Ans: Overnight Funds offer modest returns with near zero risk that largely reflect tri-party repo rates minus the minimal fund expenses. These funds are meant for institutional investors to generate superior returns compared to current accounts and term deposits from their daily surplus cash that would have otherwise remained idle.

Instead, retail investors with similar requirement should park their money in liquid or ultra short term funds. These funds are actively managed by a seasoned portfolio manager and typically invest in higher quality debt and money market instruments with lower duration. In most of the circumstances, these funds generate superior returns to comparable term deposits. Due to their open-ended structure, these funds also offer continuous liquidity enabling investors to park or redeem their money frequently subject to exit loads, if any. However, it should be borne in mind that the underlying bonds in these funds are ultimately market linked instruments that are exposed to price risks howsoever minimal they might be.

Q6. With the majority of Indian household savings still parked in bank deposits, what would be your primary argument for why an investor should consider debt mutual funds over a bank FD- and in what circumstances might an FD still make more sense?

Ans: If I were to assume that both FDs and debt MFs generate equivalent returns and since they also share the same tax structure, I would still vote for debt MFs due to the diversity of products available in the space unlike a plain vanilla FD, the benefit of an active management from a professional money manager and continuous liquidity that enables the investor to buy and sell as per his financial needs.

Source: Internal Research

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