NBFCs faced asset-liability mismatch, getting corrected by banks’ lending to them: ICICI Prudential AMC MD & CEO

There is no fundamental issue. Some NBFCs faced an ALM mismatch which is getting corrected by banks’ lending to them; a conversion of short term debt raised by mutual funds to long term debt with the banks. NBFCs have over past 3-4 years witnessed significant growth and when anything grows at such a fast pace, there is a likelihood of some issues to arise.

MFs have high exposure to NBFCs and HFCs and the sharp decline in their share prices has pulled down the MF performance significantly. How do you plan to tackle this situation?

As a fund house, we had an underweight stance on this sector. This is because over the last three years the players in this segment had witnessed a sharp rally and many of the names were in the expensive zone. The current correction playing out in this space is a normal correction seen in an expensive pocket, just like in any other sector from time to time.

What should be the strategy of investors during periods of high market volatility?

For novice investors, the best strategy is to invest in balanced advantage category of funds during volatile times. Whatever be the market levels, such funds would invest across equity and debt, based on their relative market valuations of the asset class. For example, in the case of balanced advantage fund, during February 2016, when the Sensex was at 23,000, the equity exposure in this scheme was at 76 per cent. On the other hand, when the markets rallied and the Sensex had touched a peak of 38,920, the equity exposure was as low as 30.13per cent, thus effectively cushioning the investor in the ensuing market correction. Now when the market has seen some correction, the equity allocation has gone up slightly. So, this strategy of managing risks on either side of market excess has helped our investors. For investors who wish to invest in debt only, credit risk fund is the category of choice. As the name suggests, these schemes look at the financial papers in the debt market, typically corporate bonds, and invest predominantly in AA and below rated corporate bonds. For those looking to invest into equities with a time horizon of 5 years and plus, can consider SIP in mid and small-cap schemes.

Liquid funds witnessed an outflow of Rs 2.11 lakh crore last month. Can you explain how it happened?

The net outflows are largely on expected lines as in the month of September there are advance tax payments and banks also liquidate their liquid fund holding owing to quarter end. In the month of October, it is likely that there will be sizeable inflows into this category of schemes once again.

What is your take on the recent changes in the total expense ratio? How are your distributors taking it and what changes are you planning at your end in terms of product structuring and designing?

We believe the recent reduction in total expense ratio is a positive development for the investor. Over the years, we have seen that any development, in which the investor stands to benefit, has proven to be beneficial for the industry in the longer run. When expenses reduce, we expect the volumes to increase manifold. The focus has to move from margins to being a volume business. Here, distribution has a key role to play given that mutual fund remains a push product. Therefore, for the manifold growth of industry, a strong and vibrant distribution community is imperative.

Do you think the MF industry will be able to sustain the growth in the wake of market volatility and liquidity crunch?

The future of MF industry remains promising because mutual fund as an investment product continues to remain under-penetrated among Indian households. Increasingly, the industry is going the digital way thereby improving efficiency in terms of both time and cost involved, and over time the fund houses have proved its ability to manage large pool of money. From time to time, as per the evolving needs of the Indian investors, the industry has crafted products such as balanced advantage category of funds which can help investors navigate volatile times with ease. On the liquidity front, the MF regulatory framework is very robust and there has been no major issues pertaining to liquidity since 2008.

How do you read the global and domestic economy, especially the impact of high crude prices and weak rupee?

On the global front, higher oil prices, rising trade protectionism, and unwinding of quantitative easing by central banks remain the top concerns. Domestically, commitment towards fiscal discipline and consolidation in an election year are all factors which the markets will be closely following. In terms of the impact of high crude oil price, India meets over 80% of its oil requirements via imports. According to experts, for every $1 rise in crude oil price, the corresponding impact on current account deficit is to the extent of $1 bn. So, any surge in crude oil price is bound to adversely affect India’s twin deficits — fiscal and current — along with currency. All of these will ultimately impact interest rate environment and consequently capital markets.