Summary of this article
SIPs continue attracting steady monthly inflows despite market volatility.
Investors are shifting from direct stocks to mutual funds.
Hybrid and multi-asset funds remain popular investment choices.
Despite volatility, retail participation in SIPs has been robust. In fact, one of the data points I saw was that inflows into mutual funds have been much higher than into direct shares though trading was at a high two years ago. Explain the phenomenon.
I think the fundamental concept of an SIP has now been understood well. It has become a natural choice to invest in the SIP. Though there is still a long way to go, SIPs will remain the permanent channel through which money will come to mutual funds.
After Covid, people found it easier to make money through equity. But in the last two years, markets remained flat. There was also a big correction. The market did not leave anybody—there was a big correction for mid-caps and small-caps and even large-cap stocks. Among Nifty 50 companies, many saw a drawdown of about 15-20 per cent.
That is the time people realised many things. One, they are losing money by speculating in F&O (futures and options). Second, they ended up paying more margin. Third, the direct equity exposure they took basis their own gut feeling or analysis have mixed results. But (many) mutual funds outperformed individual portfolios.
People have realised that they shouldn’t chase returns, rather stay in a structured product like a mutual fund. The good thing is we are seeing consolidation of volume—Rs 30,000 crore-31,000 crore is coming per month through SIPs.
Though equity inflows are increasing, debt has seen an outflow. Why is that?
Debt outflow is seasonal. Most of the investment comes from corporates, treasuries, institutional customers, HNIs, and family offices. And after the Israel-Iran war broke out and oil prices shot up, there was pressure on the bond market directly correlated to the currency. When the currency market comes under pressure, it actually has a direct impact on the bond market. And bond market movement has a direct impact on money market liquidity. Therefore, it has an impact on the mutual fund space. But now that it is back on track, I think that money has again come back. Plus, banks were offering very high interest rates in March. So, I think people would have decided that rather than being in mark-to-market paper, can I (stay in banks). In my view, the investors would have got it wrong. We used to tell people to invest in duration assets for about six months. For somebody who has lived through that pain, the returns have been superb. Sometimes in the bond market you have to be a little patient. But in general, retail participation in debt is very low.
Has on-par-taxation of debt mutual funds and FDs made the latter more attractive?
Not so much. I think it has happened in the case of retail. Retail has moved to hybrid mutual funds.
But the debt market needs more attention. We have also made representations to the finance ministry to consider taxation. If it is on par with equity, there’s no problem. We need a vibrant capital market. It should have debt, equity, preference shares, long-term bonds, infrastructure bonds, coupon-bearing instruments, zero-coupon instruments and so on.
Around two years ago, when the markets were stagnant, a lot of people were saying that multi-asset funds and hybrid funds are the way forward. Is that true even now?
Yes, multi-asset allocation fund and hybrid category will continue to remain one of the larger growing asset classes. If I have to invest, 50 per cent of the assets will be in actively managed long-only assets like flexi and large cap and multi cap. The second category is the or multi-asset category. Then a balanced advantage fund is more akin to a regular income kind of thing. It’s more in the range of about 9 to 11 per cent (return).
We also run a fund called the equity savings fund, which gives you a tax-efficient good return. Then comes the arbitrage fund, which is more tax-efficient from an investor’s point of view.
Then comes fixed income, which is more for emergency allocation and liquidity. There, you should definitely look at short-term recurring income, but don’t bother about taxation is you are okay with money being safer. Our Birla Income Plus, in the last 25 years, if we leave aside tax, has given 9.5-10 per cent return.
Aditya Birla Sun Life Mutual Fund has traditionally been debt-focused mutual fund. Now you’re moving into hybrid and multi-asset. Why the transition?
Historically, since I have been in the system for 33-35 years, we started as an equity fund house. Then the software Internet bubble happened in 2000 and we had to de-risk ourselves by launching a series of fixed-income funds. Then we showcased our capability in fixed income. Then, in 2004-2005, we built back our equity franchise. That is the time I took over as CIO. So we built our equity and took it from 15 per cent to almost 48 per cent, which is large. Fixed income remained as one of our core strengths, but along with that, we also built equity by bringing in the right talent. Now, we can say, we are a hybrid fund house—providing equity, hybrid and fixed-income capabilities. We are also building our AIF (alternative investment fund). We have built a size of about Rs1,000-1,500 crore in that space.
What about specialised investment funds (SIFs)?
We want to launch the SIF category after creating a talent pool. If you want to undertake more trades to optimise return, then I need a separate team of people. It is about the volume versus value trades. An equity portfolio manager will do one trade for optimising return, here you have to do multiple trades. Every portfolio has to be looked at from an optimisation point of view.
But SIF as a category will remain. This will be the third category within the equity space: equity, hybrid, and then SIF. The only thing is that it needs an exclusive team as someone has to be on the job on a daily basis.
You are not heavy on thematic within the equity space. Why is that?
We already have enough on our plate. We have been the pioneers in thematic schemes. We were the first to introduce multinational companies in India, even manufacturing. We were thinking about an automobile, then converted that into a manufacturing portfolio. Likewise, Birla has been quite innovative with focus on Gen Z consumption, travel and so on. But we don’t want to just keep on launching for the sake of launching. It has to have relevance and merit to the sector.
Also, it should be large enough. Take capital markets. I can launch it, but the total market cap of capital markets is only about Rs3.5-6 lakh crores. If you launch it, then you’ll have more money chasing a smaller piece of pie, which we don’t want to do. Thematic has to be scalable; it cannot be too restrictive.
If you look at our thematic funds, they are a bit broader in nature but more focused on a certain segment of the market, like manufacturing. I’ll not have services in that or the hotel industry.
How are you positioning your debt portfolios right now across small, medium and long durations?
We have been quite bullish on duration. Our CIO of Fixed Income has been of the opinion that inflation will remain under control, and the RBI (Reserve Bank of India) will continue to focus on providing liquidity.
Long duration is about 3.5-4.5 years; we are not going beyond that. Post this market volatility, we brought it down to about 3.6-3.7 years. After the market rally, we are maintaining close to 3.5-3.6 years.
We remain bullish on G-Secs and SDLs (state development loans) because they are attractively priced. Corporate bonds are priced more finely than G-secs. So in a fund like a dynamic bond fund, we take a mix of both.
We have an exclusive credit fund. We go down the credit curve about 2-3, with exposure to A+, A- kind of securities.
Where do you see the markets going from here?
We, as a fund house, are reasonably bullish for two to three reasons. One, the current conflict is not benefiting anybody. Even the economies supposed to do well are facing difficulty; even the US. Our belief is that it will come to an end very soon. Second, from an Indian perspective, the valuation is cheap. And FII flows, in my view, will reverse. Once global trade starts to see volatility, that volatility will reverse the flows into India. Third, the MSCI weightage index for India is 8.5-9 per cent; it can go up to 13-14 per cent, which is another way money flow could reverse. Fourth, the government is also quite conscious of the fact. Once F&O is done, you’ll see flows coming through the large IPOs that are coming in. You will see a series of events bringing flows into the country. The earnings of the companies are not going to be bad. The automobile sector is likely to be good, and software companies have been coming out with good numbers, so that gives a lot of confidence. I think if the FII deposit comes, it can help the banks save roughly about 30-40 basis points in terms of cost of borrowing. If the cost of borrowing comes down, that will start improving the overall margin for banks.
If you look at it objectively, we will see the market showing an uptick. We are also seeing expansion in the market. As a fund house, we’ve been suggesting that now is a good time to launch a small-cap fund alongside flexi-cap and multi-cap funds. Small-cap stocks are a good place to invest right now.
You are on a country-wide yatra right now. What have you observed on the ground?
I see passion levels are high (among distributors). They have also understood that hand-holding of customers is needed as a lot of new investors have come post Covid.
In general, people are bullish over the longer term. Also, development is visible in smaller cities—there are industries and institutions. Real estate prices are inching up. All this is creating a holistic wealth effect.
Your advice to equity and debt investors.
Equity investors: If you are not an investor, start investing. If you have invested, continue to stay invested. If you have money, increase the allocation to equity. Within that, increase the allocation towards three-fourths of the categories: flexi cap, multi cap, multi-asset fund (balanced fund in the hybrid category), and small cap. High-net-worth individuals should consider AIFs as well, if you are satisfied with a 14-15 per cent kind of gross return. Lastly, keep the return expectation to 11-12 per cent (from equity); then you’ll make better decisions.
Debt investors: We are seeing that the duration play will work, so don’t ignore fixed income. It is a cushion to the portfolio, which you need during market volatility. That can be done through arbitrage funds, hybrid fixed-income oriented funds, and fixed income, with a return of 9-9.5 per cent.
