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Some pockets in mid, small caps have turned attractive, S Naren of ICICI Pru Mutual Fund

We spoke to to S Naren, ED & CIO, ICICI Prudential Mutual Fund, to find out what is in store for mutual fund investors.

, ET Online|
Jun 25, 2019, 11.42 AM IST
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ET Online
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Union budget is just around the corner. Worries about economic growth and corporate earnings are lingering on. Shivani Bazaz of ETMutualFunds.com reached out to S Naren, ED & CIO, ICICI Prudential Mutual Fund, to find out what is in store for mutual fund investors. Edited email interview.

The new government has sworn in, and market participants have shifted the attention to Budget 2019. How do you view the current situation, and what are your expectations on the budget?
We are of the view that a decade of a single party rule with a strong majority is a very big positive for India given the past instances where governments were run by parties in coalition.
Post elections, our outlook on equities has improved, as it has been observed that whenever the election outcome is favorable, equity as an asset class tends to do well. However, over long term, markets seek direction from macro-economic indicators which highlight the overall health of the economy.
In the upcoming Budget, the government may announce steps to address rural distress, boost farm income apart from rolling out long-term transformational plans for the country.

Despite all uncertainties, the market has touched an all-time high recently. However, there is a lot of volatility in the market and many funds are struggling in the one-year period. How do you view the scenario?

The rally seen in the Indian equity space is not broad-based and is largely concentrated in the large cap space. Within large caps too, it’s just a handful of names which have been leading the up-move. On the other hand, mutual funds are products where the investments are diversified in nature. Therefore, there has been a brief period of benchmark underperformance given the concentrated nature of the market rally.

Do you think the positive sentiment about the return of BJP government alone would drive the market? Do you foresee economic revival and corporate bounce back in the near future?

We believe the corporate earnings recovery is in its early stages this year and will be one of the supporting factors for the market rally. The earnings support will primarily emerge from domestic cyclicals and financials, both of which have significant weightages in the benchmark indices. This is in contrast to what has been prevalent over the past five years where consumption was the main earnings driver.

Many market participants believe that small and mid caps segments are poised for a rally as the valuations have become attractive after the recent corrections. What is your view on this? And what would you advice to mutual fund investors?

In the recent correction, certain pockets in mid and small caps have turned attractive. We are positive on this space from three to five year perspective and are of the view that investors who are ready to stay invested for the long term can initiate SIPs into mid and small caps in the current market.

A lot of questions are being asked about the NBFC crisis in the market. Some fund managers believe that it won't impact the entire market. How serious is the NBFC crisis at this point?
The NBFC crisis is a development which is likely to have a very limited impact on the mutual fund industry as a whole. This is because the debt papers which are under stress is limited to specific schemes within select fund houses. Moreover, when compared to GDP proportion, the cumulative size of the problem is insignificant.

Many mutual fund investors are worried about their investments in mutual funds because of the ongoing crisis. What is your advice to them?

It is important for debt market investors to understand that the the ongoing crisis is limited to certain schemes in the industry. At ICICI Prudential AMC we had zero/nil exposure to most of the NBFC names that came up with having issues. This has been possible because of the stringent risk assessment practices put into place by way of instituting an independent Investment Risk Management team. The core responsibility of this team is to oversee credit evaluation and approval processes.

So, from an investor perspective, it is imperative for them to check on the risk management practices followed by a fund house. Secondly, isolated negative developments in schemes of industry having exposure to certain names which are facing issues should not deter a long term investor from halting their investment plan.

In fact, our framework signals that accrual schemes have moved into 'buy' territory with attractive valuations (spread between repo rate), reduced flows, and negative sentiments (NBFC liquidity crunch). The risk-reward benefit has turned favourable and it's a good time to earn the carry with high credit spreads available in the corporate bond space. Having said that, we remain cognizant of managing the liquidity, concentration, credit and duration in our accrual portfolios to provide better risk-adjusted returns.
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