Investors May Look To Invest In Debt Schemes

Prathit Bhobe
CEO and Managing Director
Tata Asset Management

Taking stock of the current financial situation where the economy and the equity markets seem to be moving in different directions, Prathit Bhobe, CEO and Managing Director, Tata Asset Management , provides some guidelines for the way ahead

After witnessing respectable inflows in the month of April 2020, equity mutual funds saw a sharp downfall in inflows in the month of May 2020. How do you read these numbers?

The redemptions in equity funds in the month of May could have been driven by a combination of factors, namely, rebound in the markets and the present economic situation that has increased the need to raise cash, especially for the smaller businesses and self-employed segments. There is some scepticism seen in this rally. With the power of hindsight, it can be said that some of the fall in March was exaggerated and hence the rally in such pockets as select banks is somewhat justifiable. We are not out of the woods yet, and the speed of the rally has surprised many. Investors have also been circumspect and they may have adopted a sell-on rally approach.

❝In addition to the financial and energy sectors, telecom, pharmaceuticals and insurance sectors are promising and will be net gainers in the post-pandemic scenario.❞

Do you still see some pain points in debt funds? From the third quarter of 2018 we are witnessing events that are denting confidence for debt MFs. Do you think that some regulatory changes are required?

The Indian economy has been facing challenging times from 2018 onwards. Profit as a percentage of GDP, which was around 7-8 per cent in 2007-2008, has fallen steadily and went below 2 per cent in 2018. Some companies which are leveraged found it difficult to service their debts. Since mutual funds are part of the financial system, some of the debt funds got affected. Due to the corona virus-related lockdown, we might see the credit matrix of corporates, banks and NBFCs deteriorating further. Investors may look to invest in debt schemes which run high-quality portfolio.

The economy and the stock market are moving in the opposite direction now. What explains this phenomenon?

The rally has been driven mostly by the global risk-on environment in equities as well as marginal improvement in the recovery data points post the gradual removal of lockdowns. Some of the consumption-based companies have reported 70-90 per cent of the prepandemic demand in the month of June even as there has been some moderation in the percentage of customers that have opted for loan moratoriums in the second round, especially in retail loans. However, the revival in business activity – in some cases to almost the prepandemic levels – could be a function of pent-up demand or restocking too. So it will not be until the September quarter that the entire picture becomes clear. The markets, however, have reacted positively to incremental improvement.

Do you see any opportunity in launching international funds,especially looking at their outperformance?

It is an interesting space and merits consideration. However, one needs to weigh the risk of a loose monetary policy leading to asset bubbles. While the global markets corrected in March 2020, the rally has been equally sharp. One needs to weigh the risk reward before considering this space.

You have recently launched Tata Multi-Asset Opportunities Fund. So, what asset allocation do you feel is right in the current market scenario? And what are your thoughts on gold as an asset class?

Tata Multi-Asset Opportunities Fund was launched with the aim of capitalising on the superior return available in commodity arbitrage versus AAA yields and can therefore generate superior returns as against hybrid equity funds which typically run with 65-70 per cent equity allocation and the rest in debt. In addition to the commodity arbitrage, there is an option to take long exposure in commodities, especially gold, that can be a good hedge in the present uncertain times.

We have seen a trend where a lot of index funds and ETFs are getting launched. However, you only have four index funds and ETFs. So, what are your thoughts on index investing? And how do you look at index investing in the future?

Warren Buffett had a good analogy for indexing. Imagine that you are watching a parade. If one person stands up to get a better view, eventually the entire crowd would be standing up to get a better view and everyone would thus end up finding it difficult to get a clear view. India is a market where investors come seeking alpha i.e. returns in excess of the index. If that becomes difficult over a period of time, the index would reign supreme. We had launched a few index funds, including the Nifty Private Bank ETF which we believe is a very differentiated offering. There will be increased appeal for index funds and ETF as we go ahead.

Despite being low on cash, how did Tata Mid-Cap Growth Fund manage to beat its benchmark and also its category? What is the investment philosophy adopted for the same?

Tata Mid-Cap Growth Fund has had a consistent track record through its focus on high-quality companies that have compounding characteristics. The portfolio has been characterised by low churn and owns companies which have benefits such as large market size, clean balance-sheets and superior management track record. We have successfully combined the above needs to manage the mid-cap fund in a tough period with the basic underlying philosophy of growth at reasonable price.

Most of your assets are dedicated towards financials and the energy sector. What led you to be bullish on these sectors? Which sectors, according to you, will play out in the next five years?

In addition to the financial and energy sectors, telecom, pharmaceuticals and insurance sectors are promising and will be net gainers in the post-pandemic scenario. Given the global and domestic momentum to reduce import dependence from China, there is also a significant opportunity for chemical exporters and contract manufacturers of electronic goods in the medium to long term.

What would be your advice to our readers at the current juncture?

Investors should maintain asset allocation. Schemes like Tata Balanced Advantage Fund are well-poised to navigate this kind of market by automatically adjusting asset allocation. We are passing through a difficult phase and it is unclear how and when the virus situation would abate. In these circumstances it may be a good idea to double your SIPs. By doing so, there is a high likelihood of some part of the money getting invested at the bottom over the next 12-18 months. While SIP takes away the difficulty of trying to time the market, SIP during downturns is even better because it brings down the average purchase price.

❝The Indian economy has been facing challenging times from 2018 onwards. Profit as a percentage of GDP, which was around 7-8 per cent in 2007-2008, has fallen steadily and went below 2 per cent in 2018 ❞

The views expressed in this article are personal in nature and do not in any way try to predict the markets or time them.