India must stay optimistic: Mutual fund experts9 min read . Updated: 03 Jul 2020, 06:51 PM IST
Our latest virtual panel discussion series addresses some of the common concerns of retail investors today. Watch Episode 1 featuring celebrated Mint editor Monika Halan, Professor Ananth Narayan from SPJIMR, and Aditya Birla Sun Life Mutual Fund MD & CEO A. Balasubramanian.
The market has suffered a series of shocks in the last few months due to the Covid-19 pandemic. Household investors are worried about their money, with many contemplating pulling out their investments. They are also at a loss when it comes to choosing safe options to park and grow their capital. How do they tide over this period of turmoil?
Our latest virtual panel discussion series—‘Riding Out the Economic Downturn with Mutual Funds’—aims to address some of the common concerns of retail investors today. The series has been planned in association with Aditya Birla Sun Life Mutual Fund.
In the first episode, we discussed how SIP numbers have grown in the last few years, credit risk in debt funds, the future of the Indian economy, and more.
The session was moderated by Monika Halan, Consulting Editor, Mint. The panelists included Ananth Narayan, Associate Professor, SP Jain Institute of Management and Research, and A. Balasubramanian, MD & CEO, Aditya Birla Sun Life Mutual Fund.
Here is an edited excerpt.
Q1) What is that kept the SIP numbers going in March? We saw a jump in the net inflows into funds. On the debt side, however, there were liquidity issues. What do you have to say about this behaviour of household investors?
Ananth: SIPs, as a culture, have grown to over ₹8,000 crore a month of steady flows, with average sizes less than ₹3,000 - it is an incredible amount of flow coming in, and, frankly, we needed this. Financialisation of savings was needed, and so was the participation of people in equity markets. The ecosystem should rightfully pat itself on its back—it’s done a good job and, hopefully, it will continue to do a good job.
There’s a second part to it, which is a little more cause for us to reflect and think about. There are other reasons why equity investments have held up over the last few years. One is that on a post-tax adjusted basis, equity investments have clearly trumped. Even if you invest in fixed deposits or debt, the returns are quite low on the post-tax basis, particularly with interest rates falling the way they have. The second is that the real estate market has been in doldrums for many, many years now. So, there is a bit of no-alternative kind of a situation, which has pushed retail investors into equity markets. In a way, the flow of money into equity mutual funds has been a self-fulfilling game—money has come in, and that’s help up the markets. In fact, before Covid-19, there were, on an average, equity purchases worth Rs.90000 crore for six years. FDI investments were barely Rs.15000 crore per year.
Like many other equity markets globally, we saw a bit of a divergence between the real economy and where markets were. This was in the pre-Covid era. Equity markets grew by 11.5% every year, whereas earnings grew by only 4% p.a. At one level, we have to acknowledge that this is a flow game. Economics should stop pretending that it is a portend of where markets are headed. Markets should stop pretending that it is a portend of where economics is headed. Flows are holding up markets and mutual funds have done a great job at harnessing those flows.
Q2) We simply do not have the kind of large IPOs, which should have happened, which would have soaked up some of this money. Do you think that the IPO flow, which should come, will come, or are we just going to see valuation increase without the requisite earnings to justify this kind of flow?
Bala: I agree with Ananth—flows have been coming into the market thanks to mutual funds. I still remember the number peaking at close to Rs.1,30,000 crore p.a. IPO is actually the function of market sentiment and how investors look at the good-quality companies when they come to the market for capitalising. Interestingly, during the Covid period, the kind of money that was raised in the form of offer for sale or in the form of qualified institutional placement was probably one of the highest in the last one year-time frame.
Capital raising will remain one of the core areas for the development of the equity market and, therefore, the financial savings will come in handy. The ideal situation would have been companies being able to fund their resources with a good mix of equity and debt. In the last one-and-a-half years, the IPOs that came to the market have gone down. Companies have been funding it through the debt route for the last 7-8 years, and pricing less money on the equity route. Flows coming into equity from financial investors at large and a lot of private equity flows are happening simultaneously.
Q3) The debt fund investor has behaved very differently. Again, in the composition of ownership, we see that it is the institutional investor who owns more, especially in the liquid and overnight funds. What has gone wrong? Has the industry only looked at the institutional client as their customer and introduced risk to households through this product category?
Ananth: In equity markets, one comforting part is that there is sufficient liquidity in the underlined market. If I compare that to debt markets, the assets under management for debt mutual funds are worth about Rs. 10 lakh crore. The real monthly secondary market volumes in corporate bonds, CPCDs, are worth less than ₹1 lakh crore. The size of the market has grown substantially; you are giving the illusion of liquidity. Yet, if people jump in and try and redeem 10% of the assets under management, you don’t have liquidity.
Here is where we all share the blame. It is not fair to blame the AMCs, or the regulators. Personally, I would start with regulators, to be honest. Both SEBI and RBI have been pushing us into the debt capital market. Everyone wants the debt capital market, yet the secondary market liquidity is simply not there. The culture that you have in equity market trading is not simply in debt. Given the lack of liquidity, this problem was waiting to happen.
Bala: Mutual funds have played a key role in channelising the money of institutional investors, retail investors, and HNIs. There are four components of NAVs—one of the large components is interest accrual; the second is the price fluctuation happening on the basis of monetary policy; the third is the rating upgrade and downgrade that has a price impact; and the last is the default.
The industry has been playing the broader role of development as well. We are channelising money to come into the capital markets through mutual funds, and all of us are growing in size, with the intention of market development. One of the areas the industry has tried to develop and mimic the US is to launch credit-related funds.
2018 and 19 were years of learning for many managers, both in terms of exposure and the kind of structures and investments in the credit line that can be done.
Q4) We called these funds credit risk, and there is credit risk in other funds as well. How do we signal that this fund has credit risk? Why don't we have a good corporate bond market?
Ananth: I think there are three aspects to a debt fund. One is the liquidity, the second is the credit quality, and the third is the duration of the fund itself. I think we should do a re- categorisation of the various schemes we have - medium duration, long duration, credit funds, and so on. There are indicators to tell investors about the riskiness of portfolios. There is clearly room for improvement. It’s a journey.
With credit rating, it could be a weighted average of the true credit risk.
Bala: Most of the players are like insurance companies. They just buy the bond and sit on it. The banks buy the corporate bonds; again, they don’t trade the corporate bonds so frequently. One reason is for the kind of volume that they can generate, and most people adapt to the principle of majority for investing in bonds. We are an active participant in this market, but the same kind of participation doesn't come from other financial institutions and investors, such as insurance companies.
Q5) The mutual fund market has grown fairly well, but this is just the beginning. The Indian investor wants high return and no risk. Is there a way to put products in a box, which don’t have fund manager risk?
Ananth: The industry is at a nascent stage. Suitability and appropriateness of selling have a long way to go. The good news is that there has been some amount of categorisation that has happened in funds, for instance, in the case of large-cap funds.
First off, things like ETFs, for instance, ought to be developing a lot more. We don’t make entire disclosures about what charges are inherent in what products. Disclosures happen on the website, but how many actually see break-up of charges? It’s a less transparent kind of a situation, where people don’t know much. Simple products like ETFs, where you are not really looking for alpha, are not really picking up, and I suspect it’s partly because they don’t pay enough money to the fund managers.
Q6) This is an idealistic place to be, we know what the problems are. How probable do you think is this idea that the industry can itself self-correct rather than a regulator taking charge of it?
Bala: I really admire the regulatory changes that have happened in the industry, and not because the regulator wanted them, but because we wanted so. There were some instances which actually impacted the mutual fund industry and, therefore, created apprehensions in investors about mutual funds.
One area where we can actually do much better is - everywhere, there is an element of fear and greed. The moment you shift the measurement criteria, then things might change.
Q7) There is a fear of global recession, and the Indian economy stalling. What are your predictions?
Ananth: It is a very uncertain world. Things are changing almost every day. But the reality is that our banking and financial ecosystem was in a bad shape even before the pandemic started. Sectors such as power, telecom, real estate, airline, and shipping were not doing well. The lockdown has been the tightest in terms of India. This is all bad news, but India’s future will always remain bright. Our potential is tremendous; our people remain our strength. Hopefully we use this crisis as we did in 1991, to pivot towards creating jobs and output. But we can’t take it for granted.
Bala: I agree with what Ananth mentioned about India looking promising. There are several reasons: one is the population, while the other is that the rural economy remains a key driver of growth. The government has taken many steps to support the economy during Covid-19. One can’t take it for granted for sure. Until and unless the credit market normalizes, we will not be able to get to a high-growth trajectory. It will take a few more months.
Watch the full interview below.