‘Good multi-asset funds should form the core part of investors’ portfolios’

Around a year ago, the control of Nippon India Asset Management Ltd (erstwhile Reliance Nippon AMC) shifted from Reliance ADAG Group to Nippon Life of Japan. Since then, the AMC has had a mixed experience. There have been defaults in its debt funds, but at the same time, it saw a surge in flows into its gold ETF (the largest in the country). Mint spoke to Sundeep Sikka, executive director and chief executive officer, Nippon Life India Asset Management to understand the journey over the past year. Edited excerpts:

It has been roughly a year since Nippon Life India AMC started operations independently (post the stake sale by Reliance ADAG). How has the experience been?

Nippon Life Insurance, a Fortune 500 company with global operations in life insurance and asset management, has been our shareholder since 2011. Last year, by increasing the stake, they became our sole sponsor. Nippon Life team posed their trust and confidence in the existing management, and the transition has been very smooth. The relationship with our clients continues to grow and strengthen. We have on-boarded over 370 institutional investors and attracted incremental flows from several high net-worth individuals and family offices. We are also expanding our international presence through their global subsidiaries.

The debt space has been challenging ever since the IL&FS default in September 2018, and the covid-19 crisis has further weakened borrowers’ balance sheets. How should mutual fund investors navigate this crisis?

While IL&FS happened in 2018, and a few other credit events have happened for very specific reasons, the industry has not witnessed any major credit event in the recent past. While the credit scenario in the covid-19 environment is certainly challenging, relatively more for some segments and specific companies, things are changing for the better. Given the current environment, our board has directed us to adopt a conservative approach and, hence, we would be investing only in high-grade assets and securities rated AA and above.

Having mentioned that, credit-oriented funds account for a very small percentage of the overall asset under management (AUM) at the industry level. Barring a few funds in select categories, most of the fixed-income funds have delivered double-digit returns in the last year. There are 12 types of mutual funds offering different maturity and credit profiles. Investors should choose categories of funds as per their investment requirements.

Multi-asset funds are gaining flavour. What are your views on this category?

Different asset classes perform at various points in time. Sometimes the difference in performance can be huge. Take the last two years, wherein gold has delivered 60% returns and the US equities are up around 30%, while domestic equities are in the negative. It would be important for investors to have exposures in multiple asset classes to ensure they don’t miss out on such returns. Staying diversified would be better than being exposed only to one. In my view, good multi-asset funds providing meaningful exposures to different assets should form the core part of investors’ portfolios.

Passive investing is gaining traction in India with fewer and fewer active funds failing to beat their benchmarks. Do you think the time has come for passive rather than active funds becoming a mutual fund investor’s core allocation?

We, being one of the largest ETF AMCs with around 75% pie in market transactions and about 35% share in investor folios, have been witnessing increasing interest for passive funds. However, I believe active and passive funds can co-exist in an investor’s portfolio. While passive funds provide exposure to the benchmark indices, active funds invest in varied investment strategies, themes or segments, among others. Investors can maintain a healthy balance and decide how much of each strategy to invest in, depending on their needs and risk profile.

The outperformance of global indices such as the S&P 500 has highlighted the need for international diversification. Do you plan to launch any active global funds or ETFs?

International funds enable geographical diversification as well as currency diversification to investors. Our US fund has generated 20% compounded annual growth rate (CAGR) over three years, and our Japan fund is up nearly 9%. During the same time, the domestic equity market’s returns have been flat. Investors are noticing this outperformance, and there has been incremental interest for investing in the international markets. In addition to the US and Japan funds, we also have Nippon India ETF Hang Seng BeES through which investors can take exposure to the Hong Kong stock market. Depending on investors’ feedback, we are evaluating products through which investors can take exposure to other regions as well.

Nippon India ETF Gold BeES has seen a spurt in inflows over the past few years. What should an investor look for while choosing a gold ETF?

Gold has typically been a natural hedge against currency depreciation and economic slowdown. With uncertainty revolving around the covid-19 pandemic, the investors are looking for safety in this asset class. We have witnessed a spurt in inflows in Nippon India ETF Gold BeES and Nippon India Gold Savings fund. We witnessed 50% plus growth in the first four months itself in AUM of our Gold BeES ETF—India’s oldest and largest gold ETF—to cross the ₹5,000 crore mark. In an ETF, liquidity is an essential factor and, therefore, investors should look at investing in an ETF that has the highest liquidity on the exchange.