The Mutual Fund Show: Should You Opt For Crypto, EV Funds?
Should you opt for crypto, EV funds?
New themes such as electric and autonomous vehicles, blockchain and semiconductors are now accessible through the mutual fund route.
Asset managers have sought the market regulator’s approval to offer exposure to such investments. A few of the applications with the Securities and Exchange Board of India include:
Nippon India S&P EV Index Fund
Mirae Asset Electric & Autonomous Vehicles ETFs FOF
Navi Electric Vehicles & Driving Technology FOF
While global electric vehicle registrations increased by more than 40% in 2020, they were still less than 5% of new cars sold, indicating a substantial room for further adoption, Prableen Bajpai, founder of FinFix Research & Analytics, said on BloombergQuint’s weekly special series The Mutual Fund Show. And since there are various statistics that point towards higher business for companies and suppliers in this space, Bajpai said a judicious selection of funds may work to an investor’s advantage.
Gurmeet Chadha, co-founder and chief executive officer at Complete Circle Consultants, agreed. But he said these are not mass retail products and need a careful customised consideration for more evolved customers.
Fixed Deposits Vs Mutual Funds
With rates set to rise, investors may wonder if fixed deposits are less attractive to some mutual fund options. And if so, what are these options?
According to Bajpai, government schemes such as National Savings Certificate, RBI floating rate savings bonds and post office monthly income scheme are fairly attractive. But if an investor wants the mutual fund route, debt schemes are a viable option since they offer the benefit of indexation, she said.
Both Bajpai and Chadha said many target maturity debt schemes are being launched, which are good options for investors looking for predictability in returns. They recommended schemes from IDFC and ICICI Prudential mutual funds. The Bharat Bond ETF series matched to maturity plan, according to them, is also a good option.
Watch the full interview here:
Here are the edited excerpts from the interview:
What is it that you have observed in terms of recent offerings which are unique, are in the news space, or have otherwise caught your eye?
Prableen Bajpai: In 2021, we have seen so many new fund offers coming in, and so many schemes which are piled up with the Securities and Exchange Board of India for approval.
And other than the fact that a lot of them are actually passive strategies, I think there's another section, which is because global investing is catching up, and through it newer themes, which are not available in India, have opened up.
Within that, things like concentrated portfolios are now possible to companies — semiconductor companies, electric vehicles, autonomous vehicles, and blockchain. These were never available to Indian investors via the mutual fund route.
These strategies are kind of second-tier products because a lot of us, in terms of assets under management, hold very little portion of our allocations outside India. So, this is like the second level within India—you first build a core portfolio like large caps and mid caps, and then you go into the satellite. These are also the satellite components as far as global investing goes.
But definitely, it's a great segment now because these themes have not been available. I particularly like the segment of electric vehicles and autonomous vehicles, which will be available through three different fund houses.
None of these are open for subscription as of yet. So, I am guessing that they are upcoming?
Prableen Bajpai: Yes, not yet. But Nippon would be tracking the electric vehicle index, that is the S&P index, which is going to give exposure for such subscriptions.
Mirae is going to take exposure to three different kinds of exchange traded funds outside India. One would probably be something on China’s electric vehicles segment as it has a huge market, especially in electric buses which is the fastest-growing segment within electric vehicles. Mirae’s parent already has a product in electric vehicles, so I think we would be tracking that and autonomous vehicles as well.
And for the third one, the Navi would also be tracking one of the global EVs and driving technology indices outside. Bigger companies, manufacturers like Volkswagen, say they will be carbon-neutral by 2039, and then you have Ford, which is going to invest $30 billion by 2025, and they say that 40% of the global car segment would be electric by 2030. This segment has a lot of potential and the work has already started. So, we are below 5% globally, in terms of cars, which are electric, but a recent report in August (Bain & Co. report) says that 12% will be electric by 2025. So, that’s going to be a huge jump.
Trucking is another industry where you can get exposure, and where level three and four autonomous trucks are coming as well as electric trucks. So, this is one segment which I think I really liked.
Gurmeet, there are varied kinds of global offerings that are coming into play including electric vehicles and crypto. What’s your sense?
Gurmeet Chadha: I am excited and at the same time a little cautious. These are typical bull market phenomena...
Prableen, is there anything in the crypto space you have looked at? I think Invesco launched something. Is there anything else?
Prableen Bajpai: ...We often link blockchain technology and, of course, cryptocurrencies. So, there is no direct exposure to cryptocurrency. But through Invesco, the reason why it was pushed forward is also because it has exposure to one of the Canadian companies, which is into mining as well as Coinbase which is a crypto exchange. So I think of these exposures, there is a bit of regulatory hurdle. But the other one, which I think Navi has filed for, would be tracking a blockchain index.
Gurmeet, you said that you are a bit cautious and at the same time you are excited. What is exciting you and why are you cautious?
Gurmeet Chadha: As Prableen has said, it has to be satellite. These are more for some evolved customers. So for basic customers, since a lot of them are international, an S&P 500 or MSCI emerging market passive strategy should do the job. You should not get carried away seeing returns because we miss out on the correlation aspect.
One idea which caught my eye was Taiwan Funds that Nippon came up with. It's not just because there is a semiconductor shortage. I think (it's also about) the composition of the index and the way companies and global majors, whether it is Amazon or all the EV majors are dependent on chips and the wider electronic industry usage on Taiwan. I know global chip shortages is a phenomenon which is unlikely to get addressed. Maybe, a small part can go there. And some of the smart beta strategies, not just offshore funds, had low volatility alpha ETFs.
Kotak came up with an Nifty Alpha Index. I think these smart beta strategies could later constitute a decent chunk of your overall allocation because we are seeing funds struggling to beat the benchmark. And these funds offer you a crossover, right between active and passive, which keeps the cost low. So, this is something for evolved clients. Normal investors are happy with a simple Nifty 50 ETF or an Equal 50 ETF. Evolved ones can go for smart beta strategies.
Would smart beta be as risky? Is smart beta also exotic or is it kind of bordering between normal and exotic?
Gurmeet Chadha: So, there are various factors. Let’s say it’s a simple smart beta strategy, it’s an Equal Nifty 50. It’s easier to understand and all stocks have equal weightage. Now, if you have a low volatility alpha index, it’s not easy to understand. The core issue here is understanding the products and a lot of people invest without understanding it. Simpler ones are may be bordering more towards the core, or more complex and exotic ones are bordering more towards the satellite part.
We will do a bit of a rapid fire for the next three topics. First, for people who still have money in fixed deposits. A bunch of them will say why should I break my fixed deposit and put it into funds out there? Do you want to prove them wrong with other options?
Gurmeet Chadha: Definitely, there are other options. The debt mutual fund indices evolved. In my view, it is underappreciated and less discussed the way we discuss equity. So, there is one category of funds which has really caught my attention and it is this target maturity fund. The target maturity funds for viewers is where your horizon exactly matches the maturity of the fund. So, there is no interest rate risk if you held the portfolio to maturity.
And the good part is now you have options available needed across tenures. So, there are options available for 2023 and 2032. You can match your data. So, anything which is long term, three years and plus, it gives you indexation benefit. If your horizon is more than three years, target maturity funds make sense.
There is a combination, AAA portfolio, available, there are government bond plus AAA portfolio available, there is this SDL (state government bond and AAA portfolio) available, so you have choices.
Since these are largely AAA and sovereign plans, the credit quality is relatively better. Yes, there can be intermittent volatility and for a long time, we have seen term premium in the market. Today, if we go a little long, above five years on the yield curve, the term premium which is basically the difference between, let’s say, an eight-year or a 10-year bond and a three-year bond is 200 basis points. So, let’s say a three-year AAA bond today is five 5%, but if you get up to six, seven years, you know, state development paper or a good PSU paper, you may get 650, 670 or 680. So, there is a term premium and that term premium is worth it. But your horizon should be a little more than three years.
And please keep in mind your tax bracket before you take any plunge. Prableen, do you want to add something?
Prableen Bajpai: I totally echo what Gurmeet has said. What would be totally underutilized, I think, is the debt segment. Overall, you can claim the capital gains. This component, you can even set it off against your losses. There are so many options within the debt segment. The newest target maturity products are wonderful. You can just decide for the next five years or the next seven years and wait. Of course, you must sit through the volatility, which will be there. But still, the predictability of returns, what they offer, is a great thing with the indexation benefit.
Let’s work with some assumptions: A person is in the high tax bracket and is willing to invest for three years, five years or beyond. Any one or two names that you can suggest that’s great for people?
Prableen Bajpai: They are looking at a more passive kind of approach. So, there is no particular product which is coming to mind. But these passive strategies by IDFC are there, then Edelweiss has these. These can be definitely picked because you are looking at three years plus horizon. For 2023, I think the yield is 4.75%. Currently, the Bharat bond, which is maturing in 2023, which is not too far, is good for a debt product. And of course, for shorter and up to three year period, you always have corporate bond low duration products. The duration that has to be kept in mind because again, this time the RBI has been very kind. There is no interest hike, but we are at the point where we will see a hike in interest rates.
What are the options for you, Gurmeet?
Gurmeet Chadha: There are two options to be precise. So, if your horizon is around three to four years there is this SDL plus PSU index fund of Birla which will mature in 2025 or 2026. The YTM are upwards of 630/640. So, I’m going with a term premium, and then there is the Bharat bond. In 2030, it's almost 680, 2032 almost 687. On a post-tax basis, I think it would be 646-650, assuming 4-5% inflation.
...Finally, on this whole thing around liquid funds which were always considered to be ultra-safe. And a couple of people have written that why is it that the fund has this tag of moderate risk? Any thoughts?
Gurmeet Chadha: You know, SEBI came up with this risk classification metric, which is supposed to get implemented from Dec. 1. It has created a bit of confusion.
So, they have basically two slabs—one is on the credit risk which is A, B and C. And then there is one, two and three, which is on the duration lists, which are predominantly the two kinds of domain risk in that market.
So, what has happened is that liquid funds by nature can invest up to 90 days. Typically, it's about 60 days, 65 days, but they can go up to 90 days and a lot of times they buy CPs and smaller maturity papers, which can be A1 rated in the short term, but could be AA rated in the long term.
Lot of NBFCs have bonds which are A-1, which is the highest safety at the shorter-end, less than one-year rating, but they still are AA. I can give you a lot of examples but the matrix takes into account the long-term rate. So, if your long-term rating is AA and in the short term it is A-1, it classifies you as second level of risk. That’s why the risk becomes moderate from low.
Nothing has really changed materially as far as the composition is concerned. You should definitely focus on these risk ratings, but a good short-term rating and AA rating isn’t too much of a cause for concern... So just go through it. Nothing materially has changed as far as this classification is concerned.
Prableen, is there anything that you would want to talk about when it comes to moderate risk?
Prableen Bajpai: Earlier, what we had in 2020 on the credit risk, liquidity risk, interest rate risk, these schemes were given these markings. So it’s a AAA, then you had a certain value given to you. If the duration is longer, then there is a certain value given and cumulatively based on these, your risk profile is calculated, and which was coming on the risk-o-meter.
Now, there is an additional layer and it takes into account the credit risk and interest rate risk. So, I’ll give an example. There is an IDFC fund which is going to be launched. Now, it has a duration of about six years. So, the interest rate risk will be high and the credit risk low. So, it would be classified as the interest rate rises as high, so it becomes three; but credit risk wise it's low risk, so it becomes A. So, this is the new structure which has come out. But I think it gives a lot of clarity because it becomes a filter. If you are looking to invest in a liquid fund and its moderate risk, you can actually go and check why it is moderate risk. And there is a lot of difference between the credit ratings for companies because predictability is there in the shorter term. So of course, a company which may be having a one plus rating may just be A or AA or AA with negative as well, when holding for a seven to eight years horizon. So I think it just becomes a great filter and investors need not be worried, at this stage. But it’s good to check why a certain rating is given or you know, the risk profile is there.