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    Equity returns may be in low teens this year: Balasubramanian of ABSL Mutual Fund

    Synopsis

    “If you have the bandwidth to continue your investments, then do not stop them or redeem in a market correction,” Balasubramanian advises.

    ETMarkets.com
    Mutual fund investors are concerned about the economic scenario caused by the Covid-19 pandemic, and its impact on their investments. Shivani Bazaz of ETMutualFunds.com reached out to A Balasubramanian, MD & CEO of Aditya Birla Sun Life Mutual Fund, for his perspective on the scenario. Bala, as he is widely known in the industry, asks investors to not give up and continue with their investments. “If you have the bandwidth to continue your investments, then do not stop them or redeem in a market correction,” he advises. For more, read the edited interview:


    Mutual fund industry is facing a testing time. After a dream run of almost five years, investors are questioning their investment in mutual funds. The inflow/outflow numbers also underscore the trend. As an industry veteran, how do you view the scenario?
    The world of investment goes through ups and downs in every 3-4 years cycle. The last one was in the year 2008. Post-Lehman crisis, a similar situation existed and in general investors’ confidence was tested as the market remained volatile for a period of two years. However, that changed post 2014 and investor confidence came back. In fact, this time, we are seeing a spate of incidents, some unprecedented. We have seen financial market uncertainty starting from IL&FS crisis, to a general slowdown in the Indian economy and subsequently the impact of COVID-19.

    During such a period, investors have to stay patient keeping in mind the purpose of investment and tenure of investment. Steps that are being taken by policy makers, whether it is from the Government or RBI or other regulatory bodies do create the right impact on the economy and financial markets for its revival over time. In fact, many steps that have been taken in the last two years should play out gradually in time to reflect in our economy and thus in the market. Equity as an asset class holds huge potential to give returns above the cost of capital, but one has to give a long rope to witness such benefit, given the impact of macro and micro economy in the short term.

    On the debt side, there were noise levels around the credit category, but fund houses at large have managed liquidity well and met investor requirements. Debt markets continue to provide significant investment opportunities and there are various other categories in debt funds across duration that have continued to deliver and grow, reflecting both investor affinity and confidence. It will remain a segment that can cater to the needs of conservative investors with a reasonable investment time horizon, as well as an essential part of asset allocation needs of all investors by providing stable returns. But like any market instrument even this asset class can go through ups and downs, which is something that must be kept in mind for any investment instrument.

    Investment is a game of patience, and a tough one especially when market cycles take longer than anticipated to turn. But what is a given is the fact that every down trend will be followed by an eventual upswing. While markets will go through its motions, if one carries a long-term focus on wealth creation and concentrates on asset allocation without being influenced by either fear or greed, there is meaningful gain to be made from mutual funds. Staying on with conviction, linked to the purpose of any investment would aid the right decision making and experience.

    Aditya Birla Sun Life Mutual Fund has taken some extra steps to make its debt funds safer in the current scenario. Would you please explain the steps?
    First and foremost, we all revisit the risk framework after any development in the marketplace that creates uncertainty in general for the economy and for the financial market. One such approach is the principle of S-L-R, which is nothing but Safety comes first, then comes Liquidity and then comes Return. However, it may not work every time as investors may also want to shift their focus from SLR to RLS. We have to strike the right balance in order to generate fair returns for investors and at the same time manage portfolio uncertainty through a disciplined approach.

    We have managed our suite of offerings, staying true to label and aligned strongly to their individual mandates of duration or credit risk. We have clearly defined the exposure that can be taken in various rated instruments. As a fund house with a 25-year legacy, we not only manage a large pool of assets in fixed income across different categories that have consistently grown and delivered above industry average return, we also manage the risk associated with both macro and micro very well through our team and with a structured approach.

    We have put in place binding conditions for portfolio exposure to single security or group in a manner that the overall portfolio diversification is maintained to reduce the risk. Maintaining safety and liquidity has always been the key focus. Our portfolios are centred on high quality AAA companies and public sector entities. In credit-oriented funds we have worked to put together a safety wall with a higher allocation of AAA and government bonds.

    The disruptions caused by the Covid pandemic point towards a bleak economic growth in the coming year. When do you see the economic growth getting back on track?

    It appears the impact of Covid has taken the economy behind by one or two years. All companies are looking at new ways of driving business post Covid learnings. At the same time, government bodies and RBI have been working overtime to provide the right interest rate environment through monetary policy and fiscal measures to pump up the economy.

    So far, we have been successful in bringing down the interest rate and improving liquidity in the system. Credit spreads have been selectively coming down. Companies are given temporary moratorium and the real activity should begin once lock down gets relaxed across the country. Therefore, one should give 3 to 6 months for things to stabilise and look for growth to come back at the beginning of 2021. Given the large size of our economy, one can expect a V shaped recovery, supported by significant interest coming from global investors to India in the area of manufacturing and asset heavy businesses.

    Should equity mutual fund investors temper their expectations on a quick revival of the stock market? Are the returns going to be muted this year?
    Equity returns may be muted given the poor growth in Indian economy and consequent earnings disruption for India Inc. While one can argue that fundamentals of the economy does not support buoyant equity markets, flows into equity from both domestic and overseas could drive the sentiment and hence can generate decent returns. Having said that, one should not expect more than low teens return from equity this year.

    Which are the best categories, sectors to ride such a challenging period?
    People across the world are adopting a lifestyle change to cope up and live with Covid 19, which has resulted in some correlated sectors and industries benefiting from this change and have performed well. It is commonly known that in different phases of the market, different sectors emerge as winners. Pharma, Telecom & Auto were winners in the recent recovery period. We are also positive on the consumer goods segment, especially small ticket discretionary items and consumer staples.

    During this period, sectors like Energy and Cement provide great comfort from the earnings point of view and valuation. There are heavy asset driven companies that have been beaten down with earnings outlook not any better in the near term. Such companies have to be looked at from other parameters such as price to book or replacement value etc. There are many value companies that may tend to perform as these firms are never found in the portfolio for delivering high growth but for their cheap valuation.

    Given the market correction and the price at which some marquee names are available, investors can look at large cap funds. The multi-cap category which has the flexibility to invest across market caps is also a good pick.

    On the debt side there are opportunities across duration. Apart from making the smart move of keeping surplus money in liquid Funds, investors can look at funds with shorter maturities from 1-3 year horizon, so Corporate Bond funds, Banking & PSU Debt Funds, Low Duration Fund, can be good categories to park money.

    Many investors are looking at gold and international funds as a new opportunity to make money during troubled times. What is your advice?
    Gold and international funds can be good from a diversification purpose, but it cannot be the core of one’s portfolio, especially for retail investors. It is advisable to look into any new investment opportunity from the point of view of one’s financial goals and objectives and asset allocation strategy.

    What do you think should be the dos and don'ts for mutual fund investors at this point?
    Various asset classes behave differently at different points of time. Hence, asset allocation helps one to protect their investments and help the investor benefit from the performance cycles of the asset classes. Continue with your SIPs that are designed to take care of market swings and avoid getting influenced by short term noises, and tracking short term data.

    Investors should spread their investments with what I call the WITS model and a solution-based approach that we follow to categorise our offerings: Wealth Solution (Equity Funds across market cap), Income Solutions (Fixed Income funds), Tax Solutions (ELSS) and Savings Solution (Liquid & Overnight funds). Mutual funds offer a variety of solutions to suit one's goals and risk appetite. Maintain a good mix of actively-managed equity funds, debt funds, and index funds or ETFs.

    The current lockdown will change consumption patterns in the long run, investors must evaluate whether that leaves room to scale up investments. This is also a good opportunity for first time investors or those sitting on the fence to enter or increase equity positions and take advantage of the market correction. With markets down and low interest rates, coupled with RBI infused liquidity, identify the opportunities arising in the equity and fixed income space, ask an expert or your financial advisor.

    Just like it was advised that one should avoid taking a moratorium on term loans if one had the ability to pay, similarly, it is advisable that if you have the bandwidth to continue your investments, then do not stop them or redeem in a market correction. If one is really pressed for resources, an investor can avail other facilities that AMCs provide to pause the SIP instalment for a few months.

    This interview is part of a series of interviews we are conducting to address the concerns raised by our readers regarding the safety and stability of their investments in both equity and debt during these testing times. Here are some previous interviews for your perusal:

    Markets may remain volatile in near term, Nimesh Shah of ICICI Pru MF
    Time to increase allocation to mid/small cap funds, says Pankaj Tibrewal of Kotak Mutual Fund
    "New love for international funds is related to disappointment with Indian equities"

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    4 Comments on this Story

    Vara Prasad33 days ago
    First fix ABSL Front Line equity fund ...one of the worst performer of the large cap fund..
    Mostly all ABSL funds are worst...investing since long time and lost now 1.5 lacs.
    Praveen Gorthi34 days ago
    On top it new change of Stamp duty.. Loot every where.. Fuel and now Financial products.. Why will people invest in them to feed govt when they are loosing their jobs...
    c b35 days ago
    Shocking to hear these comments from Mr. Balasubramanian. During these volatile periods, mutual funds who can read the trend and keep abreast of corporate news, actually mint money. Goose fund managers will ensure tripling of dividend payouts. But the usual trend is to keep the cream for themselves and distribute parse amounts. AMCs and their staff get rich payments at the cost of the helpless investors' hard-earned money.
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