PGIM India Short Maturity Fund is offering eye-popping 17% returns in the last one year. The returns are more than double the average returns offered by the short duration category. The scheme is ahead of its peers by a wide margin
PGIM India Short Maturity Fund is offering eye-popping 17% returns in the last one year. The returns are more than double the average returns offered by the short duration category. The scheme is ahead of its peers by a wide margin. ETMutualFunds.com spoke to Puneet Pal, Deputy Head-Fixed Income, PGIM India Mutual Fund, to find out how the scheme managed this remarkable feat. We also asked him about the recent developments in the debt mutual fund space, and for his advice to debt mutual fund investors. Read the edited interview.
PGIM India Short Maturity Fund is offering 17% returns in the last one year? The returns are far ahead of the category average return of 7.79% in the same period. UTI Short Term Fund, ranked second in the short duration category, is offering around 13%. What is the reason behind this extraordinary performance?
The fund was able to ride the fall in yields over the last one year. We have seen yields coming down significantly over the last one year, aided by rate cuts and liquidity infusion by RBI. The operational rate has shifted to the reverse repo rate, a fall of 240 basis points in the last one year. AAA PSU Bond yields have mirrored the fall in the policy rates and have fallen by about 240 basis points.
We have been maintaining a very good portfolio quality, supported by our internal rating process, which has helped the fund to avoid credit-related losses. So, I will say that superior security selection, which is supported by a robust credit evaluation process and the right duration calls, helped the performance of the fund.
The scheme had a rough patch in September 2019, when it fell sharply and also recouped most of the losses. It must have been a roller-coaster ride for the fund house and investors. Can you take us through that period?
We had an exposure to an SO (Structured Obligation) security, where the valuation yield went up as the credit yields were generally going up in the market but as the security was maturing in a short span of time, the fund gained when the security matured. We were proactive in our communication to our investors / distributors to keep them updated on the short-term developments to enable them to remain invested in the fund during this period.
The scheme is sitting on a large cash pile of around 26%. What is the rationale behind this?
We had maintained a slightly higher proportion of cash in the portfolio at the end of last month, as we booked some profits on the back of the RBI rate cut on 22nd May 2020. Also , given that June is the quarter end, traditionally there are some outflows. So, it was a combination of profit booking and preparing for some outflows related to the quarter end that led us to keep more cash.
Do you think short duration funds like PGIM India Short Maturity Fund are likely to benefit from the softer rate regime? Even Fed is expecting near zero rate for the next two years?
Yes, we expect shorter maturity funds to continue to perform well from the softer interests rate regime. Given the disruption caused by the COVID19 pandemic, we expect rates to remain low in the developed markets, also indicated in the recent US Federal Reserve meeting. The scenario of ultra low to negative Interest rates in the developed markets along with the humongous amount of liquidity infusion by the central banks, will have a rub-off effect on emerging markets, including India.
Most money market analysts are not hopeful for further easing of rates in India. What is your view?
We continue to expect further easing from RBI to the extent of 25-50 basis. We expect RBI to cut rates towards the end of the year. Our view is based on the fact that India is going to see a contraction in growth this year. RBI has also acknowledged this fact in the last MPC meeting. Given the backdrop of contraction in GDP growth and the fact that we are constrained to give a meaningful fiscal stimulus to the economy, the monetary policy will have to provide more stimulus to the economy.
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The debt mutual fund space is going through a tough phase. Most investors are wary of investing in debt funds. What would you recommend to conservative investors looking to park money for a short to medium horizon?
We would recommend that conservative investors should invest in good quality portfolios with low duration risk . Good quality short maturity funds and banking & PSU funds with moderate duration should be able to give better risk-adjusted returns over a medium-term horizon. We expect further easing of rates from RBI and given that the credit cycle is still not out of the woods, a low duration good credit quality portfolio is an ideal bet for a conservative Investor.
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