Mr. Sailesh Raj Bhan

CIO - Equity Investment, Nippon India Mutual Fund

Sailesh Raj Bhan is CIO - Equity Investments at Nippon India Mutual Fund. He has over 27 years of experience in Indian Equity Markets with over 19years at Nippon Life India Asset Management Limited. An MBA in Finance and CFA by qualification, he has been managing multiple flagship funds namely, Nippon India Large Cap Fund, Nippon India Multi Cap Fund & Nippon India Pharma Fund for over 15 years.

Q1. What are your thoughts on the overall budget and its impact on the equity markets, the economy, and other key areas?

Fiscally prudent balanced budget with its 3-pronged strategy 1) supporting consumption through tax cuts 2) maintaining capex thrust & creating better environment for bigger role private sector and 3) fiscal prudence. More disposable income is likely to lead to higher spending, better consumer - business confidence and eventually private capex recovery backed by credit growth revival. We expect the budget will be viewed positively by markets and domestic flows will be supportive.

Q2. When discussing the Budget, it's clear that several incentives have been introduced for the middle class to drive consumption. However, the capital market's expectations were not fully addressed. What are your thoughts on this?

Consumption slowdown was a key area which was sought to be addressed by the budget, however the Capex push was maintained despite the constraints of fiscal prudence. Total capex spend is projected to grow at 10% YoY against 8% in FY25. Including extra budgetary resources (IEBR), total capex spend is likely to grow 11% against 7% in FY25. Within total capex, the growth in roads and railways capex (including IEBR) is flat (0%) in FY26 ( 5-7% YoY in FY25 while defense capex is projected to grow 13% YoY in FY26 versus 4% in FY25. Apart from these measures ease of doing businesses has been the key theme of the Budget, which can help in improving Private Sector capex.

Q3. Have there been any changes in FIIs' concerns or their positioning following the Budget?

The prevailing global macroeconomic conditions along domestic factors may weigh on the sentiment of foreign investors in the short run. This along with the currency volatility based on policy shifts in the US is another parameter which will influence the flows. While the India equity valuations have moderated with large caps closer to long term averages and broader premiums have come off from the highs, it is anticipated the FIIs may remain cautious in the near term till better visibility emerges from a macro perspective.

Q4. What are the most and least promising sectors after the Budget?

Large financials, consumer discretionary segment along with structural themes like urbanization, premiumization and localization of manufacturing appear well placed in the current context

Q5. Given the recent market volatility, what are your predictions for future SIP trends? Have you observed any recent changes in SIP inflows or a shift in allocation patterns?

SIPs are great form of long-term wealth building. Given the extent of investor awareness through various educational initiatives, it is unlikely that SIP flows may witness large scale stoppages. Although, there have not been any significant changes in allocation pattern, it is likely that large cap and large cap-oriented categories like Flexi/Multi/Large Mid Cap etc. may witness higher investor preference on higher than usual volatility.

Q6. Suppose someone with a three-year investment horizon, particularly Gen Z investors who entered the market post-COVID, is now facing a 20-30% drawdown in their mutual fund. They might be questioning their decision, thinking, "What should we do?" How should they navigate this situation?

Asset allocation in line with an investor’s need is very important and in case there is deviation in the same due to market swings, its essential that the same is rebalanced in line with financial needs. Accordingly portfolio can be realigned and investors with shorter time horizon and less risk appetite can consider hybrid strategies like Balanced Advantage or Multi asset allocation funds or even consider adding some debt allocations.

Alternatively if the investor can extend the investment horizon and has appropriate risk appetite they can continue with their investments. Historically it has been observed that sharp decline in equity markets offer great opportunity to accumulate more units (at lower prices) like 2000, 2008, 2013, 2020 wherein the returns post the correction phase can be meaningful.

Mr. Amit Tripathi

CIO - Fixed Income, Nippon India Mutual Fund

Amit has 27 years of experience in Capital Markets. He has been with NIMF for more than 20 years. He has successfully managed fixed income and hybrid funds for the past two decades. Many of these funds have been recognized for superior performance both nationally and internationally. In his current role as CIO- Fixed Income, he leads a team of 22 highly motivated and experienced fixed income professionals.

Q1. Following the policy announcement, why did the bond markets initially react with disappointment, despite yields rising a few basis points?

Bonds markets reacted with disappointment post first rate cut as the move was already priced in by the market. Absence of any specific announcement with respect to liquidity measures even as the RBI guided to ensure sufficient system liquidity coupled with absence of change in stance led to spike in bond yields.

Q2. With two major events-the Union Budget and the highly anticipated rate cut-now behind us, what are your expectations for yields?

Given the good performance of long-term bond yields over the last 12-18 months risk-return trade off appears in favour of short end of the curve i.e 1-5 year. Liquidity easing measures by the RBI may lead to steepening of the yield curve, leading to lower yields at short end of the curve across assets. While a conduct of OMO purchase by the RBI is positive for 10-year benchmark GOI bond. Any incremental deterioration in growth and further rate cuts by the RBI and fall in US bond yields may be positive for long duration.

Q3. How are your debt funds positioned in terms of duration? Have the recent policy updates led to any adjustments?

We have made no changes in the duration and are on the higher side of the duration in the intermediate duration fund category to benefit from the potential rate cuts and liquidity easing measures.

Q4. What according to you were the key takeaways from the governor's speech?

• Given the current growth-inflation dynamics, the MPC felt that a less restrictive monetary policy is more appropriate at the current juncture.

• MPC to use the flexibility embedded in the inflation targeting framework while responding to the evolving growth-inflation dynamics.

• To proactively take appropriate measures to ensure orderly liquidity conditions.

Q5. What advice would you give investors on positioning their fixed-income portfolios considering the budget announcements and the RBI rate cut?

Given a marginal term spread, between 5 and 10-year GOI bonds at around 4 bps, with the 5 year GOI bond currently hovering around 6.65% and the 10-year GOI bond at around 6.69% we expect term spread to widen. Further, the yield of the AAA rated 3- and 5-year corporate bonds currently stands at around 7.30% and 7.26%, respectively, as compared to the 6.63% and 6.65% yield of the GOI bonds of the same tenure. Thus, offering an opportunity of spread compression of corporate bonds over GOI bonds. Further liquidity infusion may soften the yields at short end of the curve.

Accordingly in line with the current market dynamics around 70%-75% of the allocation may be considered at intermediate duration (which invests in 3-5 yr corporate bonds and 5-10 yr g-secs), such as short term funds, corporate bond fund, low duration fund, Banking & PSU debt Fund. and remaining 25%-30% at the long end of the curve.

Mr. Nimesh Chandan

Chief Investment Officer - Fixed Income India

Bajaj Finserv

Nimesh Chandan is an Investment Professional with 22 years of experience in investing in the Indian capital markets. He has an established track record in managing money and advising clients, both Domestic and International, Retail as well as Institutional.

Over the years, he has developed an investment process that generates alpha through informational, analytical as well as behavioural edge. He has been part of the mutual fund industry for 18 years where has managed products across market capitalisation and themes, and developed models on Sustainable Investing, Quant Investing and Asset Allocation..

Nimesh is a keen follower of Behavioural Finance and has been writing and presenting on the role of psychology in Investment Decision-making to the investment community. He has developed a set of processes and tools that help reduce one’s behavioural mistakes and understand the crowd or market behaviour.

Q1. A major event in the US is the potential return of Trump with "Trump 2.0." How do you think this could influence US monetary policy, and what impact might it have on interest rates globally?

The potential return of Trump with "Trump 2.0" could bring significant policy shifts, impacting global markets and monetary policy indirectly. His administration's platform of improving government efficiency and reducing budgetary expenditure could influence fiscal policy, possibly curbing certain government programs to manage deficits. However, pro-business policies, including deregulation and tax incentives, might stimulate economic growth, potentially leading to inflationary pressures that the US Federal Reserve would need to monitor closely.

Key uncertainties, such as tariffs, visa policies, and inflation, add layers of complexity. Trade restrictions or tariff uncertainty could disrupt global supply chains, increasing costs and fueling inflation, while visa policy changes might impact labor markets and productivity. These factors could lead the Federal Reserve to adopt a cautious stance, balancing growth support with inflation control. For now, a "wait and watch" approach is prudent as the situation evolves, keeping a close eye on data and developments that could shape interest rates globally.

Q2. In 2024, the US Federal Reserve reduced interest rates by 100 basis points, yet the US 10-year bond yields have risen by about 70-80 basis points. Meanwhile, despite the Reserve Bank of India not cutting rates, the 10-year G-Sec yield posted its steepest decline in four years in 2024. The yield ended at 6.7597%, dropping 42 basis points on-year after easing 15 bps in 2023. How do you interpret these developments in the context of both economies?

Some of the reasons for rising US 10 year bond yields are:

• Economists initially projected 1.2% growth for 2024, but this estimate more than doubled to 2.7% by year-end. Stronger-than-expected growth reduced the likelihood of further Federal Reserve rate cuts, pushing yields higher.

• Economic uncertainty continues to drive yields upward, with lingering questions about the Fed's future rate path and the potential inflationary impact of new administration policies.

• If markets anticipate higher future inflation, long-term bond yields may rise, regardless of rate cuts.

Some of the factors attributing to falling 10 year G-Sec yields are:

1. Easing Inflation: India's retail inflation moderated significantly in 2024, reducing pressure on yields.

2. Global Impact: Falling US Treasury yields earlier in the year and expectations of global monetary easing improved risk sentiment, benefiting Indian bonds.

3. Foreign Inflows: Improved global liquidity conditions likely attracted Foreign Portfolio Investors (FPIs) to Indian debt markets, strengthening demand for G-Secs.

4. Supply Management by RBI: Proactive Open Market Operations (OMOs) and bond-buying programs by the RBI ensured smooth absorption of government borrowing, keeping yields under control.

Q3. What are the key risks that fixed income investors should be mindful of?

1. Interest Rate Risk: When interest rates rise, the price of existing bonds tends to fall, leading to potential capital losses. This is a key risk for investors holding longer-duration bonds. Short-duration bond funds or those focused on floating-rate securities can help mitigate this risk.

2. Credit Risk: This refers to the risk that the issuer of the bond may default on its interest payments or principal repayment. For investors in corporate bonds or lower-rated bonds, it's essential to assess the creditworthiness of the issuer. Opting for funds focused on high-quality, investment-grade bonds can reduce exposure to credit risk.

3. Inflation Risk: Inflation erodes the purchasing power of fixed income returns. If inflation rises significantly, the real return on fixed income securities may turn negative. Investors looking for protection against inflation may consider inflation-linked bonds or funds with exposure to sectors that tend to perform well in inflationary environments, such as government securities or short-duration bonds.

4. Liquidity Risk: Some fixed income securities, particularly those in less liquid markets, can be difficult to sell quickly without a loss in value. This risk is more relevant for investors in lower-rated or illiquid bonds. Funds that focus on more liquid, high-quality bonds can help mitigate this risk.

5. Reinvestment Risk: This arises when interest or principal payments from bonds need to be reinvested, but prevailing interest rates are lower than when the original investment was made. Investors can mitigate this by opting for laddered bond strategies or funds that actively manage reinvestment opportunities.

Q4. What investment strategies would you recommend for investors at both the short end and long end of the curve in 2025?

Investment strategies for 2025 should consider the prevailing macroeconomic environment, interest rate trends, and individual investor objectives. At the short end of the curve, the focus is typically on managing liquidity and capital preservation. Investors may look to take advantage of opportunities that offer stable returns with lower interest rate sensitivity, keeping duration relatively short to mitigate volatility risks. This approach is particularly suited for those with a shorter investment horizon or those seeking to park funds temporarily.

For the long end of the curve, strategies would likely depend on the trajectory of interest rates and inflation expectations. A stable or declining rate environment could provide opportunities to lock in higher yields for the long term, benefiting from potential price appreciation. However, long-duration investments carry higher interest rate risks and may be better suited for investors with a longer horizon and a greater tolerance for volatility. Across both ends, diversification and alignment with individual financial goals remain key to navigating market uncertainties effectively.

Q5. With the RBI raising its inflation projection and lowering its GDP growth forecast for the current fiscal year, what is your outlook on economic growth? Do you believe it can pick up in the second half of this fiscal year?

The RBI's decision to raise its inflation projection and lower its GDP growth forecast reflects the challenges posed by persistent inflationary pressures and global uncertainties. These adjustments suggest a cautious economic environment where growth might face headwinds in the near term due to higher costs, subdued external demand, and tighter monetary conditions.

That said, economic growth in the second half of the fiscal year could pick up, supported by factors like a good festive season, strong government spending, and resilient domestic demand. Additionally, easing inflationary pressures, if achieved, could improve consumer and business sentiment, fostering a recovery in key sectors. However, much will depend on external factors like global growth trends, geopolitical developments, and commodity price movements. A balanced and measured approach remains crucial for navigating these evolving conditions.