A Balasubramanian: ‘We’re keeping exposure to risky NBFCs under control’

The mutual fund sector was not impacted so much due to liquidity squeeze unlike in the year 2008-09 and July 2013. However, there was growing fear that liquidity will become tight due to high oil price and resultant pressure on the Indian rupee. This got further complicated post IL&FS crisis. While the fear of liquidity remained, in reality, all MF players managed the liquidity of all debt funds quite well and met redemptions without delay.

Are you going slow in investing in the instruments of NBFC sector? Has the risk in the sector increased?

As always, we as a mutual fund have been choosy while investing in any credit instruments. We also ensure all investment in credit, right from top notch rated to lower rated paper are backed by proper covenants and build sufficient risk mitigation while investing. Risk mitigation generally comprises of asset cover, debt to profit cover, promoter or parent company guarantee wherever it is possible. On top of it, close risk monitoring ensures it brings sufficient alarm bell for a constant vigilance on such exposures. With respect to NBFCs, while our exposure has come down compared to the exposure in the month of September, we have also been keeping the overall exposure under control to such NBFCs whose perceived risk is also high. We would like to believe their financial condition is good to meet all their obligation. However, growth of these companies may see temporary slowdown which in turn might keep the risk in this sector high from the equity valuation point of view.

MF industry has seen a slowdown in AUM growth in the recent past. Will the industry be able to maintain the growth in the last two years?

While the growth of the MF industry in the last few years was exceptionally good, especially post demonetisation in equity schemes, a similar growth going forward is likely to get moderated. However, overall net inflows into equity funds and in general to mutual fund industry will continue to remain a trend going forward. Having said that, we also see a dominant proportion of this flow coming through SIP, given the fact it is gaining more acceptance from a large pool of new investors.

What’s your advice to retail investors considering the volatility in markets and the currency?

Retail investors should keep high focus on choosing mutual fund products across fixed income schemes to equity schemes. Within this, focus on investing at regular interval in the form of a systematic investment plan (SIP) should continue in order to build long-term portfolio. Markets do give return in a bumpy manner, however, in the long run it does generate return over nominal GDP growth. Mutual fund fixed income schemes also act as a good alternate to bank fixed deposit. Though mutual funds do not guarantee return, they do generate reasonably good return over three years adjusted for tax i.e Indexation. Therefore, all investors should have exposure to mutual fund for different purposes such as savings (liquid fund), income (fixed income schemes), wealth creation (equity schemes) and tax savings (ELSS schemes). With this process, all needs of investors can be met out of the above themes of a mutual fund.

What are the prospects for the economy pre and post general elections?

Indian economy is on a growth wicket and is likely to witness optimistic scenario irrespective of the election outcome. Fundamentals of the economy are getting better each passing time due to the powerful reforms that have been undertaken by the current Government. Powerful reforms such as GST, RERA, and Insolvency Code Act, among other things, will take no doubt some more time to yield the desired results, but they are likely to deliver significant output for the Indian economy as we move forward. I call this as a structural reform for long-term benefit which will stay permanent irrespective of any political environment.

What’s your view on the interest rate scenario in the country?

Interest rate scenario seems to be getting better post the recent fall in oil prices as well as inflation. Inflation has surprised everyone given the fall in agriculture commodity prices and it has given further comfort to policy makers to keep the interest rate stable. If the fall in oil prices stay low for some more time, added with the growing feeling of US slowdown, one can expect interest rate to soften a bit and hence the current hiking mode may get reversed both in US and in India.

How will the Sebi move to allow side pocketing, or segregation of distressed or illiquid assets, impact MFs?

Mutual funds are one of the large players among other financial services players in the Indian bond and credit market. Currently it manages as an industry close to Rs 15 lakh crore, investing in variety of fixed income instruments. During times of stress, the financial market and in particularly the credit market, mutual fund investment into bond markets may also encounter with credit default risk. When such things happen, a segregated account creation for such default assets is right in order to keep the rest of the portfolio intact and safe. This should benefit investors whose money in the investment has turned default, in the long run. It is a good move from the SEBI as a new regulation.