Chandresh Kumar Nigam: ‘Ignore short-term market movements on account of events such as elections’

It is extremely difficult for any investor to remain cut off from the market sentiment. This is an unfortunate reality of the market and we have seen this same behaviour globally across markets. To a certain extent this challenge is becoming greater in the current era with investors having access to seemingly endless news and articles on Indian and global markets. Sadly, the tone of the coverage also falls prey to the market sentiment i.e. we allow market levels to decide how bullish or bearish we feel.

What’s inescapable is that the share of MFs (mutual funds) in the household savings pie should keep improving over time even though it may not move in a straight line. So from a medium term perspective, the MF industry prospects remain as bright as ever.

What’s your advice to retail investors against the background of election uncertainties and market volatility?

I think the information overload created by the internet and social media has ensured that we keep lurching from one event to the other. So the investor who chooses to worry can find an endless stream of things to worry about. Today it’s the upcoming elections, last year it was currency or crude oil, before which it was the US Fed. The hard reality is that there are multiple levels of uncertainties for any such event. First is the likely outcome, next is how the market will react to each outcome and finally how that reaction plays out at a stock specific level. So my simple advice is to not worry about things not in one’s control and instead focus on maintaining long-term discipline and to make the portfolio robust against timing shocks through the use of regular investing tools.

Do you think high volatility on stock markets is scaring away small investors? Should investors keep away till the elections are over?

Behavioural science tells us that as investors, we look for a positive reinforcement to our actions. That’s when we invest and market goes up in the short term, we feel that we have been proven right and are emboldened to keep investing and vice versa on the way down. The only way out of this is to look at regular investing for the long term and to ignore short term market movements on account of events such as elections. If we look at the last so many general elections that have taken place in India, we have seen that the short term market reaction has not sustained and the market tends to revert back to its medium to long term trend soon after.

There are reports that mutual funds have invested big in the debt instruments of promoter holding companies which had fallen recently in the stock market. Is there a systemic risk?

Debt mutual funds have grown substantially in size over the last five years. The key factor behind this was the movement from physical to financial assets by households on account of falling inflation and consequent availability of higher real rates. A lot of the inflows have come in credit funds which are more diversified in nature. The higher flows have allowed for disintermediation where MFs have been able to get borrowers to move away from bank borrowing and tap capital markets instead. This trend has also been reinforced by a push from the regulator who wanted corporates to diversify their borrowings.

However, debt MF lending is still a very small part of credit pool in India which remains dominated by banks and NBFCs. Also, we believe that credit assessment standards at MFs are extremely sophisticated and are probably the most stringent in the lending ecosystem.

So while there can always be one-off credit events, we believe that there is no systemic risk at the debt funds end and we expect this category to keep growing and rewarding investors going forward.

Financial markets, especially NBFCs and HFCs, faced liquidity crunch after the IL&FS defaults. Has the liquidity condition in the money market stabilised?

We believe that while to a large extent markets have normalised, there remain some key differences. First is that credit spreads have continued to widen and according to us are at their most attractive level in the last several years. Also, the normalisation has not played out identically for all borrowers — so some borrowers face more pressures than others, at times rightly but also at times irrationally. We think that these times allow fund managers to differentiate themselves and also require cool heads from the investors’ perspective.

Many promoters who have pledged shares for funds have seen their share prices falling and getting margin money calls. Do you think this will erode investor confidence and valuation?

Pledging shares is just a vehicle used for borrowing. We think there is nothing right or wrong about this vehicle compared to any other as long as the lender due diligence is thorough. The core issue is whether the borrowers are borrowing on a prudent basis or are they overextending themselves. We have seen time and again that over indebtedness ends badly for the borrower and the lender regardless of the vehicle used.

Liquid funds have been showing huge volatility in terms of inflows and outflows in the recent past. What’s going on?

By nature, liquid funds are meant as vehicles to manage short term liquidity by investors — both retail and corporate. These funds invest in extremely short duration and highly liquid instruments and are quite capable to handling substantial inflows and outflows on a routine basis.