This is the right time to invest in long-term bonds, says Siddharth Chaudhary of Bajaj Finserv AMC | Mint

Fixed income instruments offer diversification and stability in the portfolio. During a bull run, most investors focus on return rather than risk and vice versa. Thanks to the lower overall yields, it is the right time to invest in fixed income instruments. Besides, investors should avoid cognitive bias and keep greed at bay, says Siddharth Chaudhary, Senior Fund Manager, Fixed Income, Bajaj Finserv Asset Management in an email interview with MintGenie.

He also shared his views on the expectations from Budget 2024. He also explained why investors should explore fixed income instruments as an important constituent of portfolio, impact of inclusion of Indian bonds in the JP Morgan Govt Bond index (Emerging Markets), among other things.

Edited Excerpts:

Why should retail investors invest in fixed income instruments, particularly during the bull run when investment in equity is delivering exceptional returns?

The most time-tested advice any investment advisor would give is to stick to the asset allocation plan which is aligned to the risk profile of an individual. The retail investor should target optimal risk adjusted return and not just highest possible returns irrespective of risk. When the risk side of the equation is quantified then the tendency of having recency bias can be restricted.

The role of fixed income, therefore, becomes very important as it offers diversification benefits and stability, predictability of returns.

What do you think will be the impact of Indian bonds in the JP Morgan Government Bonds Index (EM) in the medium and long term?

First it would attract substantial foreign money with FPI holding possibly increasing from 2.5% to higher than 4.0% within the next year. These inflows can potentially reach $40 billion. This will put downward pressure on government bond yields and some of it is already priced in.

In recent times stable macroeconomic environment, favourable demand-supply equation of G-secs and expectation of start of rate cut cycle has meant that India’s long term bond yield have remain well bid and less volatile

In long term this will enhance the depth of the bond market with one more suitor for India’s sovereign issuances is there now, therefore it diversifies sources for government borrowing, and lower borrowing costs with only possible negative that if there are any unfavourable changes macro-economic scenario, then there may be bouts of volatility in rates markets as some of the FPI allocations are actively managed.

What are your expectations from Budget 2024 which the FM will present in a couple of weeks from now?

The central government’s target is to bring the fiscal deficit down to 5.1% of GDP in FY25 and to 4.5% of GDP in FY26. There was a possibility that the pace of the fiscal consolidation would have accelerated from FY25 itself but now we think that we will just achieve the target as the government may focus more on subsidies and welfare schemes to cater to the lower-income and rural sector of the economy.

Also Read | What does the stock market expect from Union Budget 2024?

In addition, any positive development on taxation for fixed income funds would be a great development.

What is the likely impact of RBI’s monetary policy in the subsequent quarters of CY 2024. Do you think the RBI will opt for a rate cut in the Dec quarter?

On one side, the current real policy rate of 2 percent is too restrictive, increasing the downside risk to future growth. On the other, recent growth momentum negates any immediate need for monetary policy easing. So, the economy can work just fine with current repo rates in near term but in medium- long term choice is complicated.

My view, monetary policy works with long legs therefore the need to ease the rate may happen sooner than market expects as of now.

Similarly on one side core inflation near 3 percent indicates that that potential growth rate is higher on other hand food inflation risks remain elevated and there is a risk that it can spill over onto core inflation and household inflation expectations.

What are your suggestions for retail investors who are not too keen to invest in fixed income instruments?

Quantify the risk in the portfolio to have a better view of possible outcomes and have a strategic asset allocation plan. Stick to the plan and rebalance your portfolio. Fixed income offers excellent diversification and stability in the portfolio. In time of exuberance much of the focus is on return rather than risk and vice versa. Avoid this cognitive bias and don’t let greed or fear take over.

Also note transformation in global economic order and prudent macroeconomic policies domestically over the years has meant overall lower yields, so from a long term perspective, this may be the right time to invest.

Can you tell us about Bajaj Finserv AMC, how it plans to be different vis-à-vis other fund houses in terms of type of schemes?

We are in an investment-driven industry for investment teams. The unique selling point is focus on investment strategies. Further the focus is on scale and relevance, through differentiated products as well as the support of distribution.

We have come out with an investment philosophy based on InQuBe, which is the AMC’s proprietary framework that adds a layer of behavioural finance to the informational and quantitative edges. We seek to eliminate behavioural biases in investment decision-making and believe this approach is capable of generating alpha consistently when measured over the long term.