AMC Speak 20th January 2015
Open 2015 with this smart investment opportunity
Kiran Kaushik, EVP & Head - Sales, HDFC AMC
 

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In his first open letter to distributors in 2015, Kiran reflects on the two big events of 2014 that have a profound impact on our markets and draws from these events to showcase a smart investment opportunity for you to discuss with your clients. Kiran argues that there is ample room for reduction in interest rates in our economy, which makes gilt funds a promising investment opportunity. Read on to understand why he believes the HDFC Gilt - Long Term Plan is an opportunity worth considering for your client portfolios.

Dear Business Associates,

Greetings from HDFC Mutual Fund!

"We will open the book. Its pages are blank. We are going to put words on them, ourselves. The book is called Opportunity and its first chapter is New Year's Day."

- Edith Lovejoy Pierce

The New Year is a fresh start. Perhaps, a good time to introspect what has changed in the last one year and lay your hands on some smart investment opportunities.

The 2 highlights of 2014, one, that we have a strong, pro-growth & business friendly government in place. Two, falling crude oil, on which the current account's savings are likely to be more than 2% of GDP on run rate basis at current oil prices over CY 14 average. Now, high inflation, twin deficits - current and fiscal account deficits, and concerns relating to impact of US tapering all seems distant memories.

Consequently, yield on ten year benchmark government bond has come down from ~8.8% in Jan 2014 to ~7.7% as on Jan 15th, 2015. As this fall is lower than fall in inflation, real rates have risen to 3.5%, which is quite high compared to past levels. In view of high real rates, benign outlook on inflation, falling fiscal deficit and a sharp improvement in current account deficit, there is reasonable room for yields to move even lower in the medium term. We continue to expect growth to gradually improve over the next year leading to a possibility of a sovereign rating upgrade. In view of the above, we reiterate our view of lower rates over the medium term. Since interest rates & bond prices have inverse relation, when interest rates fall prices increase. This will help funds with relatively higher duration to deliver superior risk-adjusted returns.

Against this backdrop, we believe investments in HDFC Gilt - Long Term Plan (refer ppt attached) offers decent investment opportunity as it is strongly positioned to benefit from a likely fall in interest rates. Following are its salient features:

  1. Invests only in Gilts, there is thus NIL Credit Risk

  2. Has a relatively Long Duration (Avg. Mat - 21.17 yrs, Mod. Duration - 9.35 yrs, as on Dec-14);

  3. Accrual & likely Capital Gains (if interest rates fall), represents two sources of returns

  4. Tax Efficient - a 3 year plus investment horizon is recommended as it will help increase the tax efficiency (Capital Gain Debt Taxation-Indexation)

Click here to download fund presentation of HDFC Gilt Fund - Long Term Plan

Visit the nearest ISC for help, if any. We shall be glad to receive your feedback on products@hdfcfund.com.

With best wishes for 2015,

Sincerely,

Kiran Kaushik

EVP & Head - Sales



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