Right time to invest in fixed income for stability, says LIC Mutual Fund's Marzban Irani

Marzban Irani is the CIO- Fixed Income at LIC Mutual Fund. He says this is the best time to invest in debt

In a conversation with Moneycontrol, Marzban Irani, CIO, Fixed Income, LIC Mutual Fund, talks about why one should invest in debt, the impact of RBI hiking the risk weight on consumer credit,  and the dangers that new investors should look out for.

Why should investors invest in debt at this time?

This is the best time to invest in debt. Our analysis shows that peak yields were coming down, and more than 80-85 percent of the time, the yields were below 7-7.5 percent. In our opinion, 7-7.5 percent is the peak yield for debt investors.

Is there any specific area within debt that one can invest in?

The sweet spot is a tenor of five or three years; there is no doubt about it from a risk-reward perspective. But that depends on the risk appetite of the investor. We have products across categories — three months, three years, five years. If somebody wants to invest for 10 years, then I would tell them to put money in equity and go for a hybrid fund.

Also read: NBFC body urges RBI to re-evaluate risk weight norms for bank loans

Do you think the RBI  hiking the risk weight on consumer credit exposure will impact the borrowing costs of NBFCs?

The move is not across all categories of loans. The RBI is looking at unsecured loans, and has implemented measures regarding  risks that it had highlighted during the policy meeting. So that type of lending, which was becoming bigger day by day, will be impacted. There are plenty of unsecured loans still being given out; the RBI is just trying to pace the process.

What will be the impact of India being included in the MSCI index? Have we already seen some results?

This is something the RBI has been working on for a long time. Impact wise, last month, there were outflows on the equity side, but around Rs 6,000 crore of inflows on the debt side. This month, we have seen similar inflows in the first 10 days itself. So investors are coming in, and that’s a positive. If the borrowing pie is Rs 100, till now only domestic investors have subscribed. Now foreign investors will come and subscribe to, say, Rs 4 out of that. So the Rs 4 will now be available with the banking system, which it can   then invest.

Now, institutions like pension funds and insurance companies are becoming bigger. When that happens, the demand for GSECs  (Government Securities) and SDLs (State Development Loans)  increases, because they have to put a certain percentage of their investment in these products.

In the US, the yield went from zero to five. But here, that is not happening. The corporate bond spread never widened in this cycle. After Covid, the spread should have widened, but it has not because there is huge demand from long-term investors.

Also read: Slew of inclusions to MSCI Smallcap index to attract inflows worth $142 million

What are the potential risks or challenges you see in the market?

We could control inflation, but because of geopolitical tensions, if the price of oil shoots up to, say $100 and above, then we can't do anything. But that should not stop investors. When they invest in mutual funds, they should look at portfolios. Each individual has their own risk appetite. They should not be chasing the YTM (Yield to Maturity) only. They should be looking at portfolios, because fixed income is for stability and equity is for growth. So when you need stability, look for a stable portfolio and invest there.

When do you expect the repo rate could change?

This is a year of carry. April onwards we might get some (monetary policy) signals on how things are progressing, given events such as elections. I think that is when we can see some (market) turnaround. Because people are more interested in that turnaround, it can happen prior to a rate cut too. Markets are always ahead of these events. So, if there are any signals, then markets will react at that point in time.

One of the signals could be foreign investors coming in. Inflation is another. Once it stabilises below 5 percent, and your core inflation is also declining, then RBI may feel more comfortable about a rate cut. The growth levels are currently very good. Why will the central bank cut rates at this point when the growth numbers are so good?

What is your view on currency?

I think we are sitting on $600 billion in reserves, with about 9 to 10 months of import cover. We are comfortable. With foreign money coming in gradually, whether in terms of debt equity, it will be good from a currency perspective.

What are you watching closely now?

I focus a lot on risk. If I were to give stability to my investors, all my decisions would start with risk. Whenever I buy something, I check what is the credit risk involved, what is the liquidity risk, and what is the duration risk involved? That interests me a lot. And that is how my whole team brings value to the investors. Because that is the best way to give back to society, because you are protecting their money while growing their wealth and, at the right time, giving them the right advice.

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