The Hindu Business Line : ‘A strong case for rates to taper off in medium/long term’

A capital protection oriented fund is not quite the same as an MIP (monthly income plan), argues Mr Raghvendra Nath, Vice-President, Marketing & Strategy, Birla Sun Life Mutual Fund. Here, in an interview with Business Line, he discusses a range of issues.

Excerpts:

What can differentiate capital protected funds from monthly income plans (MIPs)?

In MIPs, the break-up between debt and equity is usually maintained in the 80-20 ratio. The portfolio is frequently rebalanced to ensure that the debt-equity ratio is maintained. Here is where a static capital protection oriented fund gets differentiated from an MIP.

While at the beginning, the allocation of the former is similar to an MIP, the similarity ends here. There is no rebalancing in case of CP funds. Therefore, if during the time horison of an investor, the equity market does well, the allocation to equity will consistently grow, providing the investor higher exposure to stocks. For instance, if the equity portion grows at 15 per cent per annum, it will scale up to almost 33 per cent of the total portfolio at the end of 5 years. The debt portion takes care of capital protection, while the equity portion can be actively managed to yield higher returns.

Capital protection is actually for the risk-averse, someone who is not willing to take active calls. Do you agree?

Yes. If you are willing to take the risk of investing in stocks, you should seek exposure to 100 per cent equity-oriented funds. From this perspective, a CP fund can be regarded as a stepping stone for those who can later take a more focused view on equity. However, it can be a good choice because of two key reasons. One, it allows investors to participate in the equity market without the risk of losing capital. Two, it creates an opportunity to earn higher returns in contrast to many other fixed-income options.

Investors are not looking too far beyond short-term debt. What can reverse this trend?

The extent of volatility in interest rates has ensured that investors look primarily at the short end of the yield curve. Any economy that has to chart a high growth path should have a reasonable level of interest rates. The fiscal guardians have to achieve a balance between interest rates, inflation and liquidity as well as the overall economic growth. All these are inter-dependent factors. There is a reasonably strong case for interest rates to taper off in the medium to long term.

Which sorts of funds are likely to sell well in the months ahead? Is there potential for, say, sector funds? Can index funds get a bigger market-share?

Our industry remains active. We will definitely see more varieties coming in. Already, fund houses are looking at international equity products, structured products, gold etc. Real estate funds can also be a popular segment once regulations come out for them.

More than sector funds, I favour thematic products focusing particular segments of the economy. These can offer a diverse portfolio of multiple sectors connected by a common motif. Infrastructure funds are a good example.

I think it will be some time before index funds start getting more attention. The reason is quite simple. Most actively managed funds have been able to outperform the benchmarks fairly consistently. In fact, the extent of outperformance is such that investors should not mind a little higher expense.

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