The Mutual Fund Show: Redeem, Pause Or Add On? What Should You Do With Your SIPs Amid Market Rout
Amid volatility lies an opportunity and this might just be the best time to put money to work, says Mirae Asset’s Swarup Mohanty.
Shares briefly plunged into bear territory in India on Friday, tracking the worst global selloff since the 2008 crisis, as the selloff triggered by the novel coronavirus outbreak continued. That has only added to the woes of investors make marginal returns or suffered losses in the last two years when select large caps drove the market in a slowing economy.
While inflows into equity mutual fund schemes and systematic investment plans have remained steady, the rout has prompted people to rethink their investment decisions.
Amid all the volatility lies an opportunity and this might just be the best time to put money to work, said Swarup Mohanty, chief executive officer at Mirae Asset Global Investments. “These are good times for giving fund managers the money and make use of the fees that you pay or hire them for and let them worry about the markets,” he said on BloombergQuint’s special series The Mutual Fund Show. “You do the needful that is giving them the money as per your allocation.”
Mahendra Kumar Jajoo, head of fixed income at the asset manager, said even debt schemes, which came under pressure due to recent events around Essel Group, Yes Bank and others, could give decent returns. “There is a belief that interest rates going forward will be fall and that should be a positive for fixed income schemes and investors can get good returns on their investment if they hold it long enough.”
Watch the full show here...
Here are the edited excerpts from the interview...
Let’s start with the good news first and then let’s go to the tougher part as well. Amid all of this volatility and all of this nervousness, the inflows into domestic mutual funds have been stable. That means that investors are still not making a beeline for safety or perceived safety.
SWARUP: It was so refreshing to see that data. You preach something and then you see that being practised, that is you buy at a good value and those numbers come out so refreshingly strong and more importantly, across categories. It is not skewed to any one category. People have bought large-cap, multi-cap, mid-cap, and small-cap. Thematic also—though there could be some NFOs there. But whatever is that, it’s a broad-based buying and those values at which they would have bought would be much better valued than the previous month itself. So, all that is well for long-term wealth creation. I was quite happy to see that data.
Has March also been okay? I’m not asking to give me specific numbers but has
March so far been steady?
SWARUP: So far, our numbers have been intact. I think we’re very happy that I got my SIPs on Monday and that NAV is a very to lock in at. So, our flows have been as per the last month.
Not just for you, but industry-wise?
SWARUP: We have not yet seen that, that’s the beauty of the market now. I mean we have to give credit to the advisory side of the business for holding good. The long-termness of this asset class of equities is really playing out well. So, a lot of maturity in the market, so all good so far.
I’d just want to come in on the debt flows as well. I mean liquid funds notwithstanding what happens in a month, the credit markets that the last 18 months have seen volatility which is to my mind unprecedented at least on the reporting side. Purely talking from flows into funds, equities are stable, but what do you reckon would happen to the non-equity side?
MAHENDRA: I guess the debt flows are positive. There are categories in which the outflows are happening. So, if you look at the last month data also, the three categories which got a decent inflow are the “low-duration”, “banking PSU,” and, “short term”.
So, that is in line with the current interest rate environment and clearly the credit side is going to suffer more. I mean, we’re just less than a week away from one of the most shocking credit events that have happened. So, I think the flows are robust and are into the schemes which have a high-quality portfolio and I think there is a universal acceptance now that they will be cutting the interest rates going forward so that should be positive for fixed income.
There is a set of advisers who are actually even going out and recommending or coming on the platform and recommending for example credit response because they believe that in some of the well-managed credit risk funds as well, any kind of risk is already in the price because you will not lose out of the entire portfolio. There could be one bad apple or two, but it’s not that the whole basket is bad and therefore the current NAVs are pricing in for those events as well. Would you concur largely, or you have a different view?
MAHENDRA: Well, as I said, my view is that we are not over the worst as far as the rate is concerned. This is the same question that I have been asked over the last six-eight months and every time I say that if you’re less than one week away from the last great event, whether it is Yes Bank this time or in the previous situations, other cases, how do you say that your troubles are over? This is because there is a change in the governance model and it is very clear that even going forward, only high-quality will perform.
I mean, there is a certain overhang of how we have been operating and there is a very little recognition of how the governance structure has changed for the economy. I’m not referring to any specifics but I’m just talking about how the banks are now either not taking a decision or are unable to make a decision, etc. So, it is becoming increasingly difficult for people to roll over financing and therefore there are challenges. Is that going to go away? If that is not going to go away, then I think one needs to be careful. I was saying that the government bonds have given perhaps the best return of all the categories and that is a reflection of how things are changing in India. People who continue to vouch for the high risk or aggressive funds, I think perhaps have yet not recognised that change in the underlying mechanism.
Since you’re on the topic of flows, I just want to wrap up this conversation by a couple of specific categories as well. You mentioned that certain thematic funds might have gotten what they did but equity flows are highest in 11 months which is a big thing as you mentioned that was a positive because it’s a vindication of the message that the industry has been trying to pass.
Very interestingly, the large-cap funds got a lion’s share and small-cap funds also made a bit of a comeback. So, that category also got the monies going in. Do you believe that this March could be slightly different because of the budget changes that have happened? Maybe the tax-saving funds may or may not see as robust flows as we’ve seen in the past?
SWARUP: We are already seeing that happening. I think numbers which are already there over the last two months are a poor reflection of the same numbers last year. See, I always believe that when you leave it to somebody to take a call, that person will invariably not take a call.
But when you look at the flows, I think what is very heartening to see is that these are the best times to probably put your fund manager to task. You are paying the fund manager and hiring a fund manager, and these are volatile times and in volatility, always lies the opportunity. These are good times for giving fund managers the money and making use of the fees that you pay or hire them for and let them worry about the markets. You do the needful (giving them the money) as per your allocation. I think the fund managers would like to receive money at this moment of time in my opinion. It’s a great time to look at the fund manager’s expertise and it’s a great time for a fund manager to do that and come out trumps over a period of time.
So, 12,400 or 12,400 thereabout levels, maybe a few of your peers have come out and said that the balance advantage fund category was a great category because the markets were looking so prime that it was great to give this fund manager. If somebody is tactically looking to make allocations; Bala was here the other day and he was talking about how people should also consider some lump sum investments and not just SIP investments. You’ve been on Twitter advocating there is a great time to buy. So, my question is what you reckon that if one is looking to take equity exposure instead of a balance advantage fund category, a pure-play equity exposure might be a better idea, currently?
SWARUP: We are big proponents of a fully invested portfolio. We believe static allocation is superior to any dynamic elements. That is our view, we might be right or wrong, but we’ve played it over and this is not just in India, we have fully invested funds globally. But a pure simple asset allocation model works over a period of time. What has happened over this- what I’ve been debating with people over a large period of time is that as we get into this SIP, STP regime, we somehow lose the risk appetite (and correct me if I’m wrong) of doing a lump-sum purchase.
The markets have corrected so dramatically and if you’re not able to do lump-sum purchase right now you have to go back and do the risk-profiling again. At these levels and you just keep the corona aside a little. I mean, everybody will agree with me when I say this you are you aspire to buy a good business at a good price. Just two months ago, we were staying away from them good businesses because of the prices we’re out of our range. But look at the prices now and at these prices, if we don’t buy a bit, then you can hurt your overall wealth creation procedure. But here we are completely static and blatant investors rather than the dynamic side of the story. That’s what we bring to the table.
The second topic what we want to talk about is what’s happened as you mentioned Mr. Jajoo about the big event that happened at Yes Bank. The unusual thing that happened with him there that the AT1 bonds have been nullified or have been written down completely.
Now, skeptics argue that ideally, bond investments should get preference over equity. Somebody else was telling me that if you look at the pure play definition, they are quasi-equity, they are in the same bucket and therefore it’s okay to do that. Legally, there’s nothing wrong out there. What’s your sense of what this action has been like and what it could do to some of the AT1 bonds that are there in the market and the funds might be holding them?
MAHENDRA: So, let me just put it this way that when there’s an AT1 bond, there’s an issuer which is the bank and there’s an investor who is typically a fixed income investor. Now, the fixed income investor, throwing it as part of his fixed debt portfolio, banks are showing it as a part of its equity. That’s where the whole problem is. I think there needs to be better recognition of the risk that is being carried in the portfolios without corresponding reward. When you invest and you take the risk, you expect to be rewarded. When this kind of a situation prevails in the market, de-facto people are buying equity at the rate of fixed income. That’s where the return and the reward mismatches exist vis-à-vis the risk that is there. Now, what I think what will happen is that people will understand that these are the kind of risks that are there. So, the sensitivity to high-quality portfolios will improve hopefully in the future.
As far as the treatment of AT1 is concerned, I think this is the first time that we are actually seeing an AT1 bond being written down to zero following a restructuring scheme. So, therefore obviously the entire legal field is open. There is a certain term of issue of those bonds which clearly mentions that prior to any such restructuring of the bank, that bond has to be written down to zero which is the copybook action that perhaps the Reserve Bank has taken. Perhaps right, perhaps a little hard-hitting those who were knowing it that it can happen, but it actually never happened. So, I think the legal process will take its course. I believe some of the bondholders who have been hit are going to the courts. I don’t really know exactly what will happen but if you just go by the terms of the issue of the bond, I think it’s par for the course. Those bonds will have been written off prior to any restructuring of this nature.