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‘RBI should revise overseas investment limit by MFs’
- At $630 billion forex reserve with the Reserve Bank of India, the country does have ability to provide some outward remittances, says Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd
Nilesh Shah, managing director (MD) of Kotak Mahindra Asset Management Co. Ltd, believes that the only solution to the current volatility is asset allocation or a Kumbhakarna-kind sleep where you don’t worry about market returns. In an interview with Mint, the mutual fund industry veteran talked about the right way to approach the market, limit on overseas investment and the underperformance in their flagship flexi-cap fund. Edited Excerpts:
There’s been significant volatility at the start of 2022. After two years of a strong rally, what is the solution for investors?
The only solution is asset allocation or Kumbhakarna-kind sleep. Now, we don’t know whether in Ramayana, Kumbhakarna invested in mutual funds (MFs) or not, but if he had invested and he had seen his net asset value (NAV) today, he probably would have woken up. So, the only solution is asset allocation. There is no mechanism whereby one can protect downside and get full upside. Best that investors can do is asset allocation.
Is balanced advantage fund (BAF) the answer to asset allocation?
Balanced advantage fund is not the only answer. There are asset allocator funds, which divide between gold, debt, equity and offshore assets. Then there are asset allocator funds that divide within these asset classes based on a conservative, medium-risk or aggressive investor. But BAF is probably the first step in creating a solution where investors can divide between debt and equity. People necessarily don’t chase returns and they don’t like complexity. They want products which are simple to understand, and they want products which they can commonsensically understand. BAF is the first step, and then on top of it, investors can have an asset allocator fund, and then even a solution-oriented fund. BAF is meant for all those investors who want to take first step into asset allocation.
The industry-wide freeze on overseas investments by MFs is in effect, with some exceptions. Will the cap be raised anytime soon?
From an investor’s point of view, this is not an issue because they can always use liberalized remittance scheme (LRS) to invest overseas. The cap is more of a MF issue. Now, at $630 billion (forex reserve), India does have the ability to provide some outward remittances. So, it is better that a very small portion of RBI’s big reserves are given to MFs, whereby we can invest overseas. Hopefully, we will be able to generate better returns, albeit at a higher risk, which will, in turn, make better returns on the overall India’s forex position. We did some analysis sometime back—the average return of offshore funds, including debt and equity, was coming at about 13%. Six-month returns were negative, but long-term returns’ weighted average was coming at about 13%. The RBI’s return will be about 1.3%, probably because their risk is low. We have to increase the limit so that we can generate better returns on the forex reserve. Moreover, the risk is not on the RBI’s balance sheet, it is on an individual’s balance sheet. We are very hopeful that the limit will be revised.
Why has Kotak MF’s flagship scheme, flexi cap fund underperformed the category average in 2020 and 2021?
We did this analysis, vis-a-vis benchmark index as on 31 December over a three-year period. There are a number of stocks (SRF, Bharat Electronics, Jubilant FoodWorks, ICICI Bank, UltraTech, BalKrishna Industries), where the scheme has delivered positive alpha, which means my process is not completely bad. Then there are stocks (ITC, HDFC, Maruti Suzuki, Yes Bank, and Coal India), where I’m underweight and the scheme has delivered positive alpha. In some stocks (GAIL and RBL), we were overweight but that didn’t work out. So, we cut our losses and moved out. This shows that we are not rigid about anything. On some stocks (Petronet LNG and Axis Bank) we were overweight, and they didn’t deliver but we are still holding. So why am I holding on to Petronet? Because we believe this de-rating of stock is not justified, and it can bounce back. Same about Axis Bank, we have a view that this bank will get re-rated. Now, on some stocks, we are underweight (Asian Paints and Adani Group) and they have given negative alpha. And then there were stocks where we were under-invested (Bajaj Finance and RIL), we realized we made a mistake and we became either equal weight or I become a neutral weight. Do I have to make an improvement? Yes, I have to ensure that I don’t go and invest in stocks where I’ve been overweight and it gives me negative alpha. Will I change my process to get this into my portfolio? The answer is no. Because we don’t know when it will fall. We are comfortable with our process, whatever small tweaks are necessary we will do, and will the fund come back in terms of performance vis-a-vis large-cap bias? One answer is yes, we are quite hopeful.
I noticed the large-cap bias in your flexi-cap fund. Could you elaborate on that compared to category?
We have almost ₹38,000 crore fund and we have been managing this fund more like 75% in large-cap, 25% in small- and mid-cap stocks. We realized that when you have to move 10-20% of a fund to the mid-cap or small-cap, impact costs are very high. When there is a huge volume, it’s more in the F&O market and not in the cash market. Second, the impact cost for small- and mid-cap categories in the cash market could be very, very high. If I’m looking for a 20-30% return and if impact cost is taking me 15-20% return, then there’s no point in going over there. So, keeping in mind the impact cost, we have said that we will position this fund as a 75-25 large-cap biased fund at this size, this is the most ideal position.
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First Published:17 Mar 2022, 10:30 PM IST
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