The asset under management of mutual funds touched a historic high of ₹30-lakh crore last month even while retail investors continue to booking profit in their long-term equity investment. The RBI’s helping hand to mutual fund to tide over debt crisis post-Covid outbreak has revived investors confidence in debt fund investment. A Balasubramanian, Managing Director, Aditya Birla Sun Life AMC spoke to BusinessLine on the industry outlook.

Excerpts:

Q) Are you convinced with the uninterrupted market rally with all economic indicators are so gloomy?

The buoyancy in the market reflects the work done by both the Government and RBI in rolling out policy reforms in interest rate and fiscal support given to various companies, small and medium enterprises with a special focus on rural sectors. With all such measures, the market rally is on the hope of economic recovery going forward. With production linked incentives the government is identifying each sector and extending support to revive them. On the one side the RBI has given support by bringing down interest rates and on the other state governments are also extending a helping hand in terms of reducing stamp duty for real estate sector. This can revive the real estate sector and help revive economic growth. Despite the pandemic, the agriculture sector has remained unaffected due to good monsoon. With all the government support, the economic indicators are improving gradually. The rally in stock market is also due to global markets’ conviction on improvement in emerging economy and India in particular. These are the dynamics that cannot be ignored. In our view, equity will remain bullish at least for the next one year.

Q) Is availability of money at zero per cent globally driving foreign fund flow in India?

I agree money flow always drive market. The market is divided into structurally high growth companies, and structurally global and domestic cyclical companies. The high growth companies have been the biggest driver of the market. Global and domestic cyclicals such as banking and financial services, tourism and hospitality and global cyclicals like metals, over a period of time when adjusted for growth, will come at cheaper valuation. Foreign money, which chased the index alone, are now chasing the cyclicals in different sectors. In the last 3-4 years, the high growth companies were the biggest beneficiaries of conviction flows. In the current juncture, cyclicals are also now beginning to benefit from the foreign flows. Earlier, the market was driven by five stocks each in Sensex and Nifty, but with broad basing of rally foreign funds are now increasingly flowing into constituents of BSE-500 and Nifty Next 50. With lower interest rate, bigger companies will start cutting down on debt and focus on equity fund raising. This broad basing of the rally could be the trend going forward.

Q) Is banks not transmitting the RBI cut in benchmark rates a concern?

I think the transmission of cut in interest rate will start happening now. RBI has reduced long term repo rates and assuring the banks that it will provide enough liquidity. The three-year borrowing rate is about 4-4.5 per cent and 10-year loan is about 6-7 per cent. The 10 year housing loan rate is among the highest at 6.9 per cent. Today no banks can lend to SMEs above 9.5 per cent and of course with the guarantee of the government. By introducing LTRO and ensuring enough liquidity, the RBI has ensured that transmission of rate cut are done at real time.

Q) Is the flood of sector specific NFOs putting investors money at risk?

Every sector goes through three years of bull run and two years of bad period. As long as the companies survive the business through these cycles they will deliver good returns. Pharma for example as a sector went through a rough patch two years back but today its prospects have changed. I believe, ESG as a concept of investing in companies which are committed to environment, social responsibility and governance will deliver good growth in long term. In the short term each development could have positive or negative impact, but these companies will come out successfully. ESG is a sustainable theme to grow wealth in the longer term.

Q) Is the concentrated portfolio of ESG a concern?

The concentration issue would differ among fund houses. We are looking at constructing a 40-50 stock portfolio for our ESG fund. Identifying 40-50 companies in this space is not a challenge. In order to ensure diversification, we have a provision to invest across overseas markets. We see enough opportunity would be there to create a reasonably well diversified portfolio coming from different sectors and market caps, domestic as well as global ones.

Q) ETFs have delivered better returns than actively managed. Do you think this to sustain?

ETF is a complementary product rather than being a competition to actively managed funds. Investors should be aware that there is a concentration risk as ETFs tracking a particular index will invest only in the constituents of the index. In a situation like current broader market rally, ETFs may not do well. ETFs should not come at the cost of actively managed fund, rather complement each other. Investors should have 10-15 per cent of asset allocation in index funds or ETFs as part of diversification.

Q) Have you restarted accepting investment in Medium Term Plan and Credit Risk debt schemes which was stopped a few months back?

Not yet. Both the funds remain shut for new subscription but if an investor want they can redeem their investment. We have bright visibility on the recovery of some of the assets, with the considerable portion already resolved. In last six month, both CRF is ranked three while MTP is number one. Once we are satisfied with the resolutions we will take a call on opening up fresh subscription.

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