The domestic bourses are at an all-time high,making equity one of the most attractive investment option. But Indians continue to prefer small saving and fixed income investments. While betting big on debt instruments,Amitabh Mohanty,head of fixed income,Reliance Mutual Fund however feels that some exposure to equity as an asset class would give better returns. In an interview with Surabhi,he explains how retail investors can get the best of both asset classes. Excerpts:
Retail debt is expected to be the next big thing. Your comments?
When you look at India,the number of investors and the amount of funds invested in fixed income instruments is huge. It is almost half the total investments by retail investors. So while we may not think of fixed income as a separate asset class,the reality is totally different. India is predominantly a fixed income investment nation with most of the money going into small savings and fixed deposits. So when we are trying to popularise the concept of wealth creation rather than the concept of wealth protection we at Reliance Mutual Funds think that the first step that should be taken and can be taken should be in the asset class of monthly income plan. As there is so much understanding and interest in fixed y at the retail level,we feel that if we offer the right product and create the right awareness,then I think retailing of fixed income mutual fund may not be as difficult as it may otherwise look.
What would be your advice to investors going for debt investments for the first time?
These products are a bit different from the usual fixed-income instruments,like a bank deposit or a post office saving scheme. For example,a monthly income plan (MIP) kind of scheme will have a marginal equity exposure of up to 20 per cent. This is good for investors who want to stay invested for a two to three year time frame. While it may have some amount of volatility in it,we feel that the returns will be much better than a fixed deposit kind of product.
What are the advantages of monthly income plans (MIPs)?
Our long-term objective is to encourage investors to shift from investing in fixed deposits to monthly-income plans. They should not completely move out of fixed deposits but their strategy should be to allocate some amount of their investment into MIPs. MIPs are the first step towards wealth creation while the objective of fixed deposits is only wealth protection. MIPs has a marginal exposure to equity and is the first step for an investor to look towards the stock markets. Once he or she is comfortable with that,they can move to a balanced fund and later to an equity fund. Investors have been investing in fixed income interest products,but not in the mutual fund space. We are trying to channelise this class of investors into the mutual fund space.
What is the investment pattern under MIPs?
The way we run our monthly income plan is that it is a marginal equity hybrid kind of fund. It has 20 percent exposure to equity while the balance 80 percent is debt. So it is a vary stable kind of fund with only 20 percent equity. We believe in equity as an asset class as we are confident that India as an economy will do well in the future which will then get reflected in the bourses. Not on a month on month or a quarter on quarter basis but in two to three year,but the MIP will reasonably outperform other pure fixed income instruments. That comes from the stable debt fund of the MIP.
What is your expectation from interest rates and yields?
It’s a very volatile environment. The RBI has taken a significant number of steps starting from January 2010 onwards. We feel inflation will start to come down from now on. Along with inflation,the other issue is global growth. In the US and EU,there is signs of weak growth. SO domestically,we will have to wait and see the impact of these measures. RBI has already raised rates five times this year and it may decide to wait and watch for the next few months. While interest rates have hardened right now by 200 to 300 basis points in the last six months and we have reached the peak,I won’t be surprised if we consolidate and might come down by 25 to 30 basis points in the next six months.
What has been the impact of the new valuation method of debt in mutual funds on retail investors?
It basically helps differentiate between those investing for cash management and long term investors. It also ensures that a 3 month investor knows that he is not subsidising an overnight investor. At the margin it has worked well for us and even for the investor it is a great option.
Reliance Cap is one of the fund managers for the Employees Provident Fund,which has just announced a 9.5 per cent return for 2010-11. Do you think it the rate is viable in the long term?
The 9.5 per cent rate is effective only for one year and it’s because of a surplus available with the EPFO. While I would not like to comment on whether it is viable in the long term,but I would like to say that Reliance Cap has been beating the benchmark return.