As mutual funds have come under criticism over investments in troubled NBFCs, Nimesh Shah, MD and CEO, ICICI Prudential AMC told Sandeep Singh that while the issue does not pose any systemic risk, fund houses will have to make distinction between NBFCs which possess securitisable portfolios. He, however, added that there are attractive pockets for investment within the segment even in the current market. Excerpts:
Do you see the NBFC crisis having a contagion effect on the overall financial services and investment sector?
We believe the NBFC crisis is an isolated, individual company-related event, which does not pose any systemic risk. Concerns pertaining to debt papers gone bad are largely restricted to specific schemes of select fund houses. This is not at an industry-wide level, as it is being thought of. The core of the recent credit events was largely due to borrowers relying on short-term market borrowings to finance their long-term use of funds, lack of adequate disclosure from companies with complex group structures leading to challenges in issuer assessment.
The other cause of concern was that credit spreads of issuer companies was significantly higher than similar rated papers. The biggest learning from the NFBC-related development is the increased focus on risk management and portfolio diversification in debt funds. Investors must understand that just as volatility is an integral part of equity investments, rating upgrades and downgrades too are a part of credit investments. However, it is important to differentiate between various ratings downgrades. Owing to recent events, the asset (investment) side of mutual funds is under scrutiny. At the same time, it is equally important to ensure there is granularity in liability (AUM) side as well.
While HFC’s have asset liability mismatch, do you think MFs should totally ignore them?
NBFC space in India is heterogeneous in nature. The business model of a gold loan NBFC will be poles apart from a two-wheeler financing company or an HCV financier or a housing finance company. The loan duration ranges from 3-6 months to 15-20 years. As a result, each of these segments has a unique asset-liability profile, of which some are under pressure currently. An NBFC which borrows short-term to lend long-term, as may be the case with a house finance company, could have an asset-liability mismatch. But it may not be the case with consumer finance NBFC where the lending duration is not more than 24 months. As an investor, the fund houses will have to make distinction between NBFCs which possess securitisable portfolios and otherwise. We believe there are attractive pockets for investment even in the current market. We have increased our exposure to NBFCs backed by strong corporate groups or banks.
With banks and MFs looking to avoid the real estate segment, do you think there should be a special window for them?
We believe for the economy to do well, lower land price is a must. Today, cost of capital and labour is reasonable, but land prices are yet to see a sizeable correction even as the sector remains over-leveraged. In India, land and capital prices tend to move in tandem, as can be seen from 1991 to 2003. Thereafter, over the next decade, both rates and land prices moved higher. However, post 2013, interest rates have come off but land prices continue to remain higher.
Mutual fund inflows have slowed and SIPs are witnessing closure. When do you see this trend reversing?
Mutual fund SIPs have grown manifold over the past few years. Industry’s SIP book has grown from Rs 4,584 crore in May 2017 to Rs 8,183 crore in May 2019. Through the last financial year, the industry SIP book has grown steadily, barring the month of May (de-growth of Rs 55 crore). However, along this journey, there have been times when the inflow would have moderated. That does not necessarily translate to the SIP’s closure. Mutual funds typically tend to be a pro-cyclical business. Investors tend to invest based on past returns. It is important to remember that to make outsized gains, one has to invest in a relatively cheap market.
With the new government in place, how do you see the equity market rally?
One of the positives for India is a decade of a single party rule with a strong majority. Post elections, our outlook on equities has improved. While equity as an asset class tends to perform well on favourable election outcome, in the long term, the market seeks direction from macro-economic indicators. From a valuation perspective, markets are not cheap, barring certain cyclical stocks. Those investing with an investment horizon of at least five years can consider SIP in mid and smallcap fund. In case of lumpsum investment, one can opt for balanced advantage category of funds. In terms of debt investment, we are positive on credit risk fund owing to the attractive yield at which corporate debt papers are available today.
You have been actively recommending credit risk funds at a time when the category is facing teething troubles?
Currently, we are of the view that credit risk category of fund presents an interesting investment opportunity, given the attractive valuations. Since yields are elevated, it could be beneficial to lock-in investments at current high yields.