Nimesh Shah, who heads ICICI Prudential Asset Management Co. Ltd and is the current chairperson of the Association of Mutual Funds in India (Amfi), believes the industry is at the cusp of growth with regulations that align the interests of all stakeholders, investors making more informed decisions and AMCs focusing on processes to efficiently manage the risks to investors’ money

The Association of Mutual Funds in India’s (Amfi) campaign to popularise equity investing in mutual funds resonated with investors and we are seeing its impact on the industry. How will the return expectation and risk parameters in debt funds be presented to investors given that these are more nuanced than equity funds?

In India, when it comes to investing, mutual funds are often relegated only for equity investing. The culture of investing in debt funds is yet to take root as retail investors are yet to understand the power of investing in debt instruments. For an investor who is concerned with equity market volatility, debt market should be the go-to option.

Over the past few years, the Indian debt market has shown impressive growth, backed by regulatory reforms, improved demand-supply dynamics, robust economic growth and channelling of money from pension funds, insurance (companies) and mutual funds. However, we believe a lot of investor education is required around debt funds. And Amfi’s campaign is likely to focus on that in its next phase. We have to understand that it is difficult for a retail investor to understand the negative co-relation between interest rates and debt value. Also, it is not easy to communicate the same.

In terms of setting the return expectation, Amfi’s campaign should focus on the communication that equity returns are made over a long period of time and are subject to volatility.

How has the mutual fund industry evolved in the last 20 years?

Over the last two decades, mutual fund as an investment product has evolved into a well-regulated, low-cost and transparent product, aiding in achieving one’s financial goal. From the removal of entry load to the recent Sebi categorisation and rationalisation of mutual fund schemes, the industry has come a long way. The effect can be seen and today the industry successfully manages 24 trillion of public money. Also, today, retail investors understand the benefit of investing via SIPs just the way they understand the benefit of yoga.

Also, companies/industry have evolved in handling the risk to an investor’s money. So asset management as a business is more of risk management. Rather than concentrating on maximising returns every passing day, what is important is to ensure that there are no accidents in terms of risk in a portfolio that can harm an investor’s experience.

What would you tell investors who are perturbed by reports of credit events around debt funds? How well is the industry equipped to handle such risks?

If one considers the size of debt mutual funds (more than 11 trillion), it could be said that debt funds have been managed relatively well. Over the years, the industry has evolved and embraced best practices such as having a robust, independent and transparent process for valuation of debt investments.

Any fixed income investment is exposed to three key risks: credit risk, interest rate risk and liquidity risk. History suggests that interest rate risk and liquidity risks have been managed effectively by the industry as a whole. Although there have been some instances of credit events which have impacted investments made by some of the schemes, these have been managed in an efficient manner without a significant impact on the industry as a whole. It is clear that adopting stringent corporate issuer selection process and ensuring adequate diversification are the keys to avoiding adverse impact of such credit events.

The industry is well- equipped to handle the risks related to investments. At ICICI Prudential Mutual Fund, we have instituted an independent investment risk management team which oversees the credit evaluation and approval processes. We ensure that investments are made after conducting appropriate credit due diligence and with requisite credit approvals.

Having done all this, given the nature of the business, there is still a possibility of a certain paper coming under pressure. Therefore, it is very important to ensure that there is no concentration risk to the portfolio. In the event of a downgrade (rating lowered), the concentration of that paper should also be lowered such that the impact would be limited to reduced returns rather than hit the principal.

How do you see Sebi’s measures to rationalise total expense ratio (TER) in mutual funds playing out over time and its impact on investors, distributors and funds?

We believe, generally, what works well for an investor will benefit the industry as well. Reduction in expense ratio is beneficial for investors, driving overall volumes as increasingly investors may be attracted to this low-expense and transparent product. So, while margins will go down, the rise in volumes can compensate for the decline. The regulation as on date ensures that the interests of all parties involved—investor, distributor and manufacturer—are aligned. Over long periods, it is not only the investor benefiting from better returns, the distributor and the product manufacturer too will gain.

In 2018, domestic institutional investors, particularly mutual funds, compensated for foreign portfolio investors outflows and kept markets steady. But assets under management (AUM) grew at a lower rate than earlier and the last quarter of 2018 saw softening of SIP flows too. Is that a blip or the start of a trend of lower inflows?

We believe the inflows via SIPs have been robust and will continue to grow. As of December 2016, the industry SIP book was at 3,973 crore which as of December 2018 has grown to 8,022 crore. In general, the SIP money tends to be sticky in nature, and is largely immune to change in market sentiment unless an adverse development was to take place.

However, when it comes to making lump sum investments, it is a known fact that retail investors largely go by the past one-year performance data of a fund. Currently, investors are turning cautious and they are thinking twice before deploying cash. We see this as a healthy sign given that investments are not guided by any sort of euphoria in the market. Such a trend is likely to continue until the market delivers sizeable returns.

What are your expectations for the markets in 2019?

At the start of 2018, we were of the view that the valuation was quite expensive and risk reward benefit was not favourable in mid- and small-caps. At the same time, we were positive on large-caps and balanced advantage category of funds, a call which has played out well for our investors. For the year 2019, with the general election around the corner, volatility cannot be ruled out. Historically, election years have proved to be volatile and in all the election years—2004, 2009 and 2014—markets have provided investors with intermittent opportunities to invest. Policy decisions by RBI, end of the bond-buying programme by central banks globally, escalation of trade wars, pace of foreign inflows, among others, would be other significant triggers for the market. During such times, the best investment strategy is to take the SIP route to accumulate equities.

What product categories will investors find acceptable in volatile and uncertain markets?

From a valuation standpoint, the Indian equity market is fairly valued. For those looking to make lump sum investments, balanced advantage funds, multi-asset and large-caps should be the preferred vehicles. In terms of themes, we are positive on special opportunities and those benefitting out of volatility. In debt, we are positive on dynamic duration schemes which can benefit from volatility, low-duration funds which tend to mitigate interest rate volatility (investing in instruments with maturity in the range of 1-3 years) along with credit risk category of funds which can capture the current elevated yields.

Systematic investments work in volatile times

What are your expectations for markets in 2019?

At the start of 2018, we were of the view that the valuation was quite expensive and risk reward benefit was not favourable in mid- and small-caps. At the same time, we were positive on large-caps and balanced advantage category of funds, a call which has played out well for our investors. For the year 2019, with the general election around the corner, volatility cannot be ruled out. Historically, election years have proved to be volatile and in all the election years—2004, 2009 and 2014—markets have provided investors with intermittent opportunities to invest. Policy decisions by RBI, end of the bond-buying programme by central banks globally, escalation of trade wars, pace of foreign inflows, among others, would be other significant triggers for the market. During such times, the best investment strategy is to take the SIP route to accumulate equities.

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