'We Think Reliance Nivesh Lakshya Fund Would Be Well-suited To Serve Long-term Goals'

First and foremost, wishing you all the best for the launch of your new NFO! The name "Nivesh Lakshya" suggests that you may be positioning this fund as an alternative to traditional Life Insurance policies - is that correct?
Reliance Nivesh Lakshya Fund is aimed at fulfilling long-term investment goals of investors. Typically, in our assessment, any individual would have one or more of the following investment objectives:

Meeting Long Term Goals: Investors would have various long-term goals and would ideally want to have a certain corpus to meet those goals. Be it tension-free retirement, child's education, or marriage of children.

Leaving a Legacy: Investors may want to pass on an assured and healthy legacy for their children or/and grandchildren.

Preservation of Wealth: They may want to protect their hard-earned net worth, while growing the same, without subjecting that to undue risks.

Through Reliance Nivesh Lakshya Fund, our endeavour is to fulfill the above needs.

What's the rationale behind launching an NFO of what is essentially a long-term debt fund at this time? Do you believe that the worst may be behind us… and that yields may have peaked out for now?
We are offering this product for investors to potentially fulfil their critical, long-term goals, and not from a perspective of helping them spot the best time to enter into the market.

We believe that investors could use this product on an ongoing basis at different points in time to help serve their long-term goals. We intend to make investments in long term fixed income securities predominantly Government Securities at the prevailing yields, and hold them for a long period of time. Hence, investors would have visibility on the likely returns for their tenure of investments, from the time of their investments. Since the underlying bonds (mostly Government Securities) pay fixed coupon over the period, the coupon rates become the main source of returns, and not the timing of entry.

How is the fund structured? Are you following a 100% hold-to-maturity strategy, or will you be buying and selling securities too? 
The Fund would make investments in long term fixed income securities predominantly Government Securities at the prevailing yields. Most of the securities would be bought and held for a very long period of time. We will manage the portfolio passively, which means that we will ensure that similar securities mix is maintained at any point in time.

For instance, if you were to buy a Government Bond yourself that bears a coupon of 8% with a tenure of 25 years and you hold this bond till maturity and reinvest all your coupons at 8%, your return (Yield Till Maturity) would also be 8%. Reliance Nivesh Lakshya Fund would do something similar by investing in long dated securities.

The product literature states that one of your key objectives is to eliminate re-investment risk for investors…. Can you elaborate on that a little bit? 
Lot of investors tend to invest for the short term, and hope to renew their investments after the maturity. Investing short-term, and keep reinvesting to meet long-term goals may not be an ideal strategy.

For instance, if an investor can compound his investment at 7% for 25 years, his Rs one crore investment would become Rs 5.43 crore. If the same investor, makes investments for short-term for 3 years, and keeps reinvesting every 3 years and if the interest rates fall during the tenure, then his investment would be worth Rs 4.18 crore (translating to an effective yield of 5.9%). This will be a scenario where interest fall by 250 basis points (bps) over 25 years.

Hence, it is important to align long-term goals with a long-term investment solution, which could potentially compound investments at prevailing higher yields, and hence potentially reduce the reinvestment risks.

We hear that the fund would start off with a modified duration of nearly 12 years. That lends it a high degree of interest rate risk. If yields continue to rise due to unexpected reasons, and the fund slips into the red, do you not foresee panic on the part of the mostly risk-averse investor base that this fund is targeting?
Investors will have to be aware that any long-duration product will be subject to higher volatility, especially in the shorter term. Hence, we will request investors and our partners selling this product to be absolutely clear about what they are getting into, have right expectations and be aligned to the long-term objectives, which the product endeavours to meet. The fund may not be ideal for the short term - any time less than 10 years minimum - unless investors have a strong view on interest rates, that it will favourably go down and the product would provide capital gains.

What's the rationale behind holding a fixed-income product for a 25-year time frame? Wouldn't an equity-oriented fund be a lot more aligned to such a time horizon? Does a 7% post-tax return do justice to such a long term investment product?
There's no doubt that equity products have the potential to generate higher returns in the long term. Having said that, there is a big segment of investors out there who prefer the safety / certainty of returns offered by traditional products. In fact, bulk of India's household wealth - more than 90% - is invested into tax-free bonds, RBI bonds, fixed deposits (FD), endowment products and real estate. These investors, though, are aware of the potential of equity returns, and possibly have a portion already invested into the asset class, prefer to invest a larger part of their wealth in products offering certainty and visibility of returns. The longer the visibility, the better.

What's your broad take on the fixed income markets at this time? Investors have had a harrowing time in the past couple of years….
Fixed Income yields have gone up across the curve on the back of challenging macro-economic environment such as - deterioration in growth inflation mix, some stress in external account and due to higher crude and developed markets yields. The Reserve Bank of India (RBI) recently hiked interest rates, and is likely to be data - dependent for further course of action. In our view, the state of the underlying economy & macro fundamentals don't warrant extreme pessimism in bond yields. The underlying term premia - the difference between 10-year G Sec yields and Repo Rate (10 year G Sec yields - Repo Rate) in the bond market is near historic high. Thus, we believe it is just a question of time, when investors see relative value in bond yields vis-à-vis cash.
Confidence will return to the market once the currency stabilizes and crude oil prices start to come down.

What are a few things investors need to keep in mind before they invest into Nivesh Lakshya?
Long-term goals require critical planning, and one will have to be spot-on when it comes to investing towards meeting the goals. The most ideal way to go about investing for the long-term goals, would be to find products offering long-term investment solutions, and hence aligning goals with investments.

We think Reliance Nivesh Lakshya Fund would be well-suited to serve long term goals - those with at least 10 years and more. In the short-term, the product, given its long-term nature, may display higher volatility. If interest rates move up, there may be capital loss / lower returns in the very short term. Investors will have to be prepared to bear the short-term pain for long-term gains.

Since Nivesh Lakshya will more or less be a passively managed fund, is it expected to have a lower expense ratio compared to other actively managed long-term debt funds?
Yes, Nivesh Lakshya Fund would have lower expenses, in the range of 20 to 50 basis points (bps).