Mutual Funds

Do not panic, and be balanced in decision-making, says Edelweiss AMC CEO Radhika Gupta

Anand Kalyanaraman | Updated on June 07, 2020

The worst thing to do is exit and make notional losses real: Edelweiss AMC CEO Radhika Gupta

In an interview with BusinessLine,Radhika Gupta, CEO, Edelweiss AMC, speaks about the rationale of the Bharat Bond ETF second tranche launch, the imperative to fine-tune mutual fund recategorisation, the market trajectory in these uncertain times, and offers some advice to investors. Edited excerpts:

Why another Bharat Bond ETF issue within a short time? What will be the impact of the Centre’s privatisation plan on the bond?

The response to the first tranche has been heartening, and, in fact, after the stress in the debt market, we have only seen flows increasing into the existing funds. With 2023 now being a 2.5-year fund and the 2030 a 9+ year fund, we felt it was a good time to add to the yield curve with a second launch.

Investor demand for a product, particularly in the middle-end, has been very high, and hence the launch at this time. Recall, when we launched Bharat Bond, we had said we wanted to build a full-year curve of ETFs (exchnage-traded funds) so that investors could choosewhat they want on the basis of their goals and ladder the portfolio. This launch is to that effect.

The construct of the portfolio remains the same — AAA CPSE (Central Public Sector Enterprise).

Two new tenors come in —2025 which is a nice five-year option, and 2031, a 10+ year option.

On privatisation, it is too early to comment until the details and timelines from the Centre are rolled out. We have factored in the possibility of a CPSE being privatised at the inception stage itself.

Once there is Cabinet approval on privatisation of a CPSE, the name (of the CPSE) gets removed from the index and, thereafter, the funds. There is time between privatisation approval and the actual event. So we believe the ETF is well-covered.

Given the learnings over the past few years, is there a need for changes in the mutual fund scheme categorisation?

I think categorisation 1.0 was a good start, but yes, I do think it’s an evolving exercise, and there is a need for a categorisation 2.0.

The last three years have taught all of us a lot about our industry and investors, and categorisation needs to address three key issues.

The first is further reducing the number of categories out there — we don’t need 16 debt categories, and even as many equity categories. This confuses investors, especially in fixed income, where essentially investors are looking for a savings account and a simple deposit equivalent.

The second is, we need to create tighter definitions of categories. Debt schemes need credit and duration restrictions both, and hybrid funds need tight guidelines on the kind of fixed income exposure funds can take. And finally, there is a need to simplify category names to make them meaningful for the average investor.

Is there a disconnect between the stock market and the real economy? The market has been rallying since March-end despite dire predictions about economic growth.

Markets always move ahead of economies, across the world. They are driven by sentiment and liquidity in the short to medium term, and fundamentals in the longer term. Indian equity markets have rallied in line with global equity markets. Oil stabilising and a gradual reopening in India are also contributing to some positivity. However, the situation remains tenuous, given that Covid-19 is very much still a real crisis and the timeline of the shape of the economic recovery is hard to predict. Brace for volatility, and potentially more drawdowns.

Should investors hold cash to tide over potentially tough times ahead or invest it to make use of stock-picking opportunities? What are you advising your investors and clients now?

One cannot say this enough — equity investing has to be a part of an overall asset allocation. If you are under-invested in equities, gradual investments via systematic transfer plans (STPs) will be a good way to start building those allocations. If you are already fairly invested in equities, the better thing to do is to stay invested, and preserve any cash on hand.

The most important thing we are telling investors is that it is important not to panic, and be balanced in their decision-making.

These are times when there is tremendous fear, including fear of the unknown, and trying to predict how worse it will get or when it will recover is difficult, if not futile. Also, remember that bad news and good news counterbalance each other. Earnings will get impacted, there will be economic hits, but there will also be strong actions from central banks and governments to balance them.

History has shown that, whether it is in India or globally, sharp equity drawdowns are followed by equally sharp rebounds.

For equity investors, the worst thing they can do is exit and make notional losses real. On the other hand, it may not also be a time to jump into volatile waters in one go. STPs are a great way to smoothen things out, while capturing some of the opportunity. For fixed-income investors, our messaging is simple — focus on basic high-quality products.

How should investors make their portfolios ready for such crisis in future?

We have to realise as an industry, and as investors, that black swan events like Covid-19 are going to become more frequent in the world we live in.

Since we cannot predict, we have to build portfolios that are prepared and robust in these times.

I would leave investors with three basic pieces of advice. The first, pay attention to liquidity in your portfolios. It is important to have cash in hand or funds that are liquid/low risk so that you can meet contingencies and take advantage of opportunities.

The second, diversify. Hold debt and equity for sure (or do this via asset allocation funds), and ideally add assets like international equities that provide a currency and a country hedge to your asset allocation. And third, limit the use of leverage. It exaggerates in both the good and bad times, and is hard to handle.

Speaking of asset allocation funds, have balanced advantage funds as a category delivered in the recent turmoil, given their flexible mandate? How is Edelweiss’ offering different?

As a category, yes, and personally, this is a category I love — I invest 70 per cent of my funds in this space. Upside participation with meaningful downside protection just ensures a better experience for investors, and if you look at the recent fall, multiple funds in this category have fallen 10-15 per cent even when markets were down 30 per cent. That is a good outcome for investors.

The benefit of being able to move swiftly between equity and debt, and the merit of having a model rather than a human do that, I think, has worked.

Our fund has done well in this period because our approach is different. While most follow a value-based model (increase exposure when markets fall and decrease when markets rise), we look at trends, or equity market health.

In simple terms, when you drive on an empty highway with good weather, pick up speed, and when you’re in the rains in a crowded city road, cut it down. As a result, we cut exposure to 35 per cent in March, from 65 per cent in January, and protected quite a bit of downside.

This approach does well in markets that have trends — up and down — and we do believe that over the long term markets move in trends. You get 10 per cent on average, but not 10, 10, 10, but -20, 30, -50, 70. This approach works well here.

Which sectors and stocks could do relatively better and may be worse off in the coming year?

It is very difficult, genuinely, to predict the impact on various sectors of the economy at a time when the lockdown has still not been completely lifted. Clearly, there are obvious winners and losers.

Large-ticket discretionary consumption will witness pain, whereas basic consumption- and healthcare-related businesses will tend to do better. In our funds, we are now overweight on some of these sectors.

What are your thoughts on the recent turmoil in debt funds?

The last two years have been undoubtedly tough times for the debt fund space, and some of what has happened is unfortunate. We have a strong belief that if mutual fund has to become a mass category, it cannot do so without debt mutual funds succeeding and being the product of choice for the average investor.

Indians are naturally savers, and debt is a part of the asset allocation. You cannot take away that. I would make a few key points.

One is that we all need to simplify the debt proposition for investors. Too many categories, too many products to cater to an investor who needs a savings account equivalent and FD-like equivalents.

To a large extent, we have, at Edelweiss AMC, tried to address the second problem with a simple quasi-sovereign product like Bharat Bond that has attracted a lot of interest, particularly in these times.

The second point is, that not all debt funds are credit-risk funds and that distinction has to be made. There is a large category of debt funds that do not carry credit risk, and retail investors should focus there. Credit-risk funds are not a product meant for a retail open- ended platform like mutual funds — because of the underlying illiquidity of the market and the nature of our investor base.

And thirdly, we as an industry need to build long-term and non-institutional assets in fixed income. A significant chunk of our assets are institutional and less than one year in nature — the focus needs to be on building a more stable long-term debt franchise. The fact that in a short period, a 10-years fund like Bharat Bond 2030 can be ₹8,000 crore, perhaps, shows this can be done.

Is the Centre’s economic package sufficient or does it fall short? What more could have been done?

We appreciate the consistent efforts being made by the government to bring the economy on track, while protecting lives in this unique situation, and with the present constraints. Despite fiscal limitations, the government and the RBI are making efforts to improve liquidity in the system, and provide relief to MSMEs and NBFCs through the credit guarantee schemes.

Even on the agricultural front, structural reforms are in the right direction. Our belief is that going forward there is scope for more measures that will boost demand and consumption, which have been significantly dented.

Published on June 07, 2020

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