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‘Fear of interest rates rising will prevail, but real hike may not be to the extent of the worry’

While bond yields have moved up in the US market recently on the back of fear of rising inflation, central bankers, on the other side, reiterated their commitment to keep interest rates stable till such time they see growth and the job market returning to normal.

Written by George Mathew
Updated: March 15, 2021 6:19:25 am
A Balasubramanian

A Balasubramanian, who oversees Rs 2.55 lakh crore assets as MD and CEO of Aditya Birla Sun Life Mutual Fund, spoke to The Indian Express on the impact of the rising bond yields, interest rates, stock valuations and investment strategies. Edited excerpts:

Bond yields are rising across the world, including India. What will be the impact on debt schemes?

While bond yields have moved up in the US market recently on the back of fear of rising inflation, central bankers, on the other side, reiterated their commitment to keep interest rates stable till such time they see growth and the job market returning to normal. Therefore, recent spike in interest rate may not pose too much risk at this point of time. Having said that, the ground is getting prepared for the interest rate to go up in the next few years on the assumption of growth returning worldwide and also rising fiscal deficit in most economies. On the basis of that money managers have become cautious in running a high duration portfolio in most of the schemes in which investors have come in the last one or two years. I presume the impact on bond funds will not be significant on the basis of recent volatility.

Why are bond yields rising? Will interest rates also go up?

Bond yields are rising on the basis of rising inflationary concern, fiscal deficit and growth returning. However, liquidity in the system is quite large … so first and foremost, the high liquidity has to be sucked up for bond yields to rise significantly. Most central bankers don’t want to be in a hurry to reduce the high liquidity in the system given that uncertainty in the economy on account of pandemic still stays as we speak. One has to look at how the vaccination drive pans out and its impact on normalcy returning soon. Post that, consumer behaviour and general movement of people have to also become normal or increase further to pre-Covid levels. Till such time, fear of interest rates going up will prevail but real hike may not happen to the extent the fear prevails.

Do you think stock market valuations are high and investors should think twice before putting money in stocks?

Stock market valuation is driven by a good combination of optimism, expectation of growth and earnings of companies.

Earnings of companies generally tend to be higher during periods of high growth. However, during the same time, markets don’t give big returns as the market tends to have time correction… which is nothing but the market is getting into consolidation and may move sideways rather than one way up that we have witnessed in 2020. It has always been difficult for a common investor to understand valuation-based investing in the market as the market goes through all phases of ups and downs at periodic intervals. Given the nature of market behaviour, investors should stay focussed on building a long-term portfolio without getting worried about market highs and lows. This should be used to build a strong portfolio which will give better experience and protection to investor savings through discipline of investing in every ups and downs. Hence, don’t think twice if you are investing for long in building an equity portfolio through disciplined and regular investments.

What should be the ideal investment strategy of retail investors in the current circumstances?

The best way to build a portfolio is through a combination of SIP and lump sum for long term. Another time-tested strategy is to build a portfolio through asset allocation between equity and debt schemes and also hybrid schemes such as asset allocation funds or dynamic asset allocation funds. It is difficult to estimate the power of market differentiation between valuation and real price movement. At times, both can remain disconnected. However, both of them follow each other with some intervals. This type of behaviour is extremely hard for retail investors to understand and capture in their investment decision making. Hence, asset allocation strategy is the right way to build a long term portfolio.

How has Covid pandemic impacted the MF industry? Equity funds have been witnessing outflows in the last couple of months.

The pandemic did have an impact initially in shaking the confidence of investors in general, as the fall in the market was unfathomable. While markets fell sharply in the first two months, regulators and government authorities reacted swiftly to bring back confidence in the market first and in the economy thereafter. Some investors missed this part of bringing back their confidence quickly. As a result of this, every bounce back in the market made investors take some profit or reduce the exposure to volatile asset classes such as equity. This was done by a small segment of people who did not have the conviction of holding for a long term.

I must also mention most of the investors in mutual funds, who have come with the purpose of long-term investing, stayed invested and thus could get to see their portfolio doing better after every rise in the market. This has reduced the redemptions from mutual funds and a trend is setting for money to flow back soon.

What’s your view on the recent RBI decision to allow retail investors to invest in govt securities?

It is a good move to bring retail participation in the government securities (G-secs) market. Most conservative investors tend to look for safety and only after that they look at returns. In order to meet the demand of such investors, retailing G-secs is a way to expand the investor base in G-secs holding pattern. MFs have played a big role in creating fixed income schemes to meet investor needs and created awareness among retail investors on categories such as low duration funds, banking and PSU funds, G-sec funds and others.

However, given the mark-to-market volatility of NAV, retailing of mutual fund fixed income is yet to become popular as it has happened in the equity space both in terms of understanding and adoption. Maybe the retailing of G-secs through the RBI window may help in getting more retail customers into mutual fund fixed income schemes as well over time.

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