Rajeev Radhakrishnan, CIO, fixed income, SBI Mutual Fund, believes that the credit default swap (CDS) market can only take off once more players like banks, provident funds, and insurers participate in it. He tells Anupreksha Jain that short-term debt funds could be a good option for investors. Excerpts:
Mutual funds have been actively participating in the secondary market for government bonds on a daily basis. Why? Usually, their presence is seen towards the month-end.
This has possibly happened because we have daily net asset value (NAV) requirements, and flows and redemptions need to be managed. So, given the nature of our products and more so now, when you have a requirement that you need to hold minimum liquidity in all portfolios, it is leading to active presence in the secondary market.
The demand for additional tier-1 and tier-2 bonds from mutual funds has been slowed down. What can the reason be?
It is a combination of various factors, including the valuation change, change in exposure norms, and the PRC (potential risk class) matrix that has led to muted demand for these bonds. Largely, base-3 bonds are mostly subscribed to by provident funds and corporates apart from wealth firms. Going forward, I do not see an immediate revival in the secondary market demand. There will be a little bit of demand on and off from mutual funds if the spreads are attractive and if there is a bit of space in the portfolio.
The Securities and Exchange Board of India (Sebi) has allowed mutual funds to participate in credit default swaps to increase liquidity in the corporate bond market. Have things improved?
No, nothing changes immediately. We need more counterparties to write swaps, and mutual funds have only been enabled to write CDS. That is a challenge. So, it will take a while for it to develop. It cannot work only with mutual funds being enabled; other counterparties, such as banks, insurance, or provident funds, also need to be given permission. They also have large credit portfolios and would need to manage the risks appropriately. Mutual funds are large players in the secondary market in corporate bonds, but then there is a bigger universe beyond them.
The amendment to mutual fund taxation has effectively reduced mutual fund activities in the corporate bond segment and would have its own effects on market development and secondary market liquidity.
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