Mr. Rahul Goswami

Chief Investment Officer - Fixed Income, Franklin Templeton Mutual Fund.

Rahul Goswami is chief investment officer (CIO) and managing director at Franklin Templeton, Fixed Income in India. In this role, Rahul oversees the fixed income functions of the locally managed and distributed debt schemes of Franklin Templeton Mutual Fund. Rahul was previously the CIO of fixed income at ICICI Prudential Asset Management (I-Pru) and a key contributor to the success of I-Pru's fixed income funds in India. Prior to I-Pru, he was a member of the Franklin Templeton India Fixed Income team, serving as portfolio manager from 2002 to 2004. Rahul also brings a wealth of experience from his time at well-regarded banks such as Standard Chartered Bank and UTI Bank. He has over 24 years' experience in managing fixed income funds. Rahul earned his M.B.A. and his bachelor's degree in science from Bhopal University.

Please note we have published the answers as it is received from the Fund Manager of Franklin Templeton Mutual Fund.

Q1. With the RBI holding the repo rate steady with a neutral stance while raising its inflation forecast amid global oil and supply-side risks, what are your expectations for the rate trajectory going forward?

Ans: As we look at the global interest rate environment, particularly in the United States, financial markets are currently pricing in the possibility of two additional rate hikes by the U.S. Federal Reserve over the next three quarters. This view is supported by the fact that U.S. economic growth continues to remain resilient, inflation has not cooled as much as anticipated, and unemployment remains relatively low at around 4.3%.

Given this backdrop, we do not believe the global interest rate environment can be described as particularly benign. The Reserve Bank of India (RBI) will remain mindful of external developments and global monetary policy trends. However, in our view, domestic economic factors will continue to play a much larger role in determining the direction of Indian interest rates.

Q2. Interest rates influence almost every asset class, from bonds to equities. How should investors understand the transmission of interest rate changes across different asset classes, and what are the key channels through which they affect investment returns?

Ans: Interest rates have a broad-based impact on the economy and different sectors could have varying degrees of sensitivity to changes in interest rates. Sectors like banks and NBFCs could see their net interest margin rising or declining with increase or decrease in interest rates respectively. Higher interest rates could discourage borrowing and reduce demand for real estate and consumer discretionary sectors. Higher interest rates raise borrowing costs for companies and could lead to postponement of capital expenditures.

On the fixed income side, bond yields are influenced by interest rate expectation. Bond yields and prices have an inverse relationship. Rising interest rates negatively impacts bond prices across tenures. Bonds with longer maturity profile are relatively more sensitive to changes in interest rates than bonds with shorter tenures. In a rising interest rate scenario, investors would prefer positioning at the lower end of the yield curve to reduce the negative impact of rising bond yields.

Q3. Investors often associate debt funds with safety, but different categories carry very different risks. How should investors understand the trade-off between credit risk and interest rate risk while selecting a debt fund?

Ans: Investors in fixed income markets are exposed to liquidity risk, credit risk and interest rate risk. The regulator has defined the broad categorization of fixed income mutual funds based on their maturity and credit risk profiles. For a conservative investor seeking to build an emergency corpus, a liquid fund would be more suitable than a long-distance fund as a liquid fund invests in money market instruments with very short maturities and carries relatively less interest rate risk. On the other hand, an investor seeking to benefit from decline in interest rates could take exposure to long-distance funds as they are more sensitive to interest rate changes. Investors seeking higher accrual gains often seek funds with higher yield to maturity. However, higher yields could often be associated with higher credit risk due to exposure to bonds with relatively lower credit ratings. This increases the credit risk of the fund and investors should be aware when taking exposures on the basis of higher yields.

Q4. Higher portfolio yields can appear attractive, but they often come with additional risks. Why should investors avoid selecting debt funds based solely on yield, and what other factors deserve equal attention?

Ans: Higher yields are often associated with higher credit risk. Investors should evaluate the portfolio quality and avoid funds with a predominantly lower credit profile if such funds are not in line with their risk appetite. Further, it would be prudent for investors to align their investments with their investment horizon and risk profile. Investors should take the help of mutual fund distributors and financial professionals who can help them select suitable funds to meet their financial needs.

Q5. In a credit market where external ratings may lag real developments, what does your in-house credit evaluation framework look like — and how do you assess a company's true debt-servicing ability?

Ans: At Franklin Templeton, we adopt a robust investment framework for credit evaluation and portfolio construction. We go beyond ratings through in-house research by leveraging our strengths on the equity research side. Our investment process begins with our macro-economic view with an in-depth analysis of macro factors, quantitative analysis and forecast of future macro trends. Further, we undertake an in-depth credit analysis, asset-liability match and yield curve analysis for issuers to be included in our portfolio. We regularly monitor and evaluate the credit profile of issuers in our portfolios and seek to maintain high quality portfolios comprising sovereign securities and high rated corporate debt instruments.

Q6. What are the most important parameters investors should evaluate before selecting an Arbitrage Fund or a Liquid Fund? Beyond recent returns, what factors deserve close attention, and what are the common mistakes investors should avoid while evaluating these schemes?

Ans: Arbitrage funds are equity-oriented hybrid mutual funds that seek to generate returns by simultaneously taking offsetting positions in the cash and derivatives markets. They aim to capture arbitrage opportunities arising from temporary price differences between the two markets, while minimizing directional equity market risk through hedged positions. These funds are suitable for investors seeking a temporary parking avenue for money to be invested or deployed elsewhere. Since these are equity-oriented funds, the taxation applicable to capital gains from these funds is similar to equity funds. Investors should evaluate the performance of these funds over different market cycles to assess their volatility and select funds which align to their risk appetite. The investment horizon for investing in arbitrage funds could be from few months up to a year.

Liquid funds invest in money market instruments with maturity up to 91 days. This makes them suitable for very conservative investors with an investment horizon of few days to a month. This can be a suitable option for investors seeking to create an emergency corpus which can be accessible anytime with relatively less volatility. Investors can seek the services of mutual fund distributors and financial professionals for selecting funds suitable for their needs.

Note: The responses and views presented in this document have been provided by the investment team of Franklin Templeton Asset Management (India) Pvt. Ltd.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.