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‘Markets often rebound ahead of earnings’

Aarati Krishnan
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Naval Bir Kumar
Naval Bir Kumar

It is best to invest in equities when prospects look uncertain. That is when you get a good price, says Naval Bir Kumar, Executive Vice-Chairman of IDFC Mutual Fund. He also thinks this is a good time for you to increase investments in long-term debt funds.

Equity markets in the last five years have delivered only a single-digit return. It has also become harder to take a call on prospects for many sectors because of policy risks and so on. Must investors raise debt allocations?

It is difficult to recommend a blanket asset allocation for everyone. As I see it, there are two periods when one can invest in equities. One is where there is an earnings risk and it is difficult to predict profits or growth rates of companies. The other kind of phase is when there is strong growth but there is price risk and valuations are high.

If you look back at the past trends in markets, investors who took on earnings risks would have made good money compared with the ones that took on price risk.

We cannot predict how long earnings risk will remain in the market. But if you look back, years such as 2003-04 depicted earnings risk, periods such as 1999-2000 showed price risk. Those who invested in the former periods made high returns.

Yes, during periods of earnings risk people do not generally like to invest. The problem is that, markets often rebound ahead of earnings and the rebound can happen very quickly. So as long as you believe that further destruction in prices is unlikely to happen, you must allocate more to equities.

What is your advice on debt investments?

The entire range of debt funds look attractive today given the yields in the debt market, particularly on a post-tax basis.

Move money out of savings bank accounts into money market funds. Don’t be lazy. If you have money for a longer tenure, opt for a mix of short and long bond funds based on when you need that money.

In the last three months, gilt funds have done well. Short-term rates are also falling sharply. Is this a good time for people to shift from short-term to long-term debt funds?

Five to six months ago, we were telling people to invest in short-term funds because the yield curve was inverted. Three-four months ago, we changed that view and recommended some allocations to long-term debt funds. Now, there is a case for even higher allocations to income and gilt funds.

IDFC Mutual Fund has been managing pension schemes for six years or so. The corpus for the National Pension Scheme really hasn’t grown much? Why?

The Pension Fund regulator is considering changes to the system. We are waiting for the Bill to go through Parliament. The good part is that the framework for managing pension funds is in place and we have been able to test it. Pension is a large segment of the market. Our own view is that investments in pension products have to happen by way of compulsory savings.

That’s how retirement accounts grow overseas. Salaried employees in companies have a forced deduction from their salary towards retirement savings. That has to be made applicable to non-organised sector employees too, probably when they make their tax payments.

SEBI is said to be considering an increase in expense ratio for mutual funds. What do you think of this?

What SEBI is trying to do is to get the industry to move away from upfront commissions, so that the interests of investors and the fund manager can be aligned. When you give upfront commissions, the investment becomes transaction-oriented.

Commissions need to flow in as investors stay with the scheme for longer periods. At the same time SEBI recognises that the total amount of money available to funds to meet administration and distribution expenses is very small. India is a very small-ticket market for mutual funds. We are moving in the right direction.

IDFC Mutual will be impacted much like other fund houses. In debt funds, expense ratios are far below the limit and may continue at those levels.

What is happening on infrastructure debt funds?

We will be launching our first fund in a few months. There were structural issues with these funds which are now being addressed.

We are very excited with infrastructure debt funds because, if you see, retail investors do not today have access to any high yield debt opportunities for the long term. At least they don’t have any instruments that aren’t high risk, such as plantation schemes, etc. If we offer quality infrastructure assets through these funds, they will fill that gap in the market.

(This article was published on August 11, 2012)
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