Interview : Vishal Kapoor CEO, IDFC AMC
CEO, IDFC AMC
"The Best Asset Allocation Looks To Maximise Returns And Minimise Risks In Line With Investors Profile And Objectives"
There has been a decline in the SIP inflows in the last two months (May and June) before recovering in the month of July 19. What is the sense that you are getting from investors?Are they frustrated with lower or negative returns? So, how has it impacted IDFC Mutual Fund and what measures the fund house is taking to control this situation?
It is good to see that the flows are still very strong with smart investors continuing to believe in the long term benefits of staying invested and reaping the benefits. When one looks at the quarterly averages between quarter ending in December, March and June, you will notice that consistently the averages have moved up for net SIP inflows and this despite the market being extremely volatile. This indicates a maturing investor who understands the value of staying invested, especially when the market is volatile. In terms of SIP book, IDFC Mutual Fund has grown faster than the industry. The average SIP book for the industry went up by 1.4% compared to last quarter and IDFC Mutual Fund’s SIP book grew by well over 10% during the same time. This is the outcome of our sustained efforts in promoting SIP as a smarter way to invest for long term investors.
"If you want more return somewhere, you have to accept higher risk, otherwise somewhere the equation will not work out."
The recent credit events such as IL&FS, Essel group and DHFL have adversely impacted the debt mutual funds, specifically, the credit risk funds and FMPs. How do you look at credit risk funds, going forward?
Over the past several years, we have been consistently highlighting the fact that in fixed income, while there is no right or wrong about taking risk, one has to be aware of one’s risk appetite and look to invest accordingly. If you want more return somewhere, you have to accept higher risk, otherwise somewhere the equation will not work out. I don’t think the category itself is something that we can blame—the name says it is credit risk. Just as in equity, where investors understand the risk they take, so too in fixed income, one has to be careful therefore about how much of your allocation should be there and what do you expect of that allocation. If you prefer safety, then you have to be in the low credit risk type of product. Don’t go by just the label, but go to the portfolio level and see what level of safety it reads and if this fund offers you that level of safety, then go there.
If you look at our own portfolio today, the bulk of our assets that investors have with us is really in the non-credit category,as most of our assets are in the quasi-government, government and AAA categories. We like to classify debt into three different buckets. The lowest end of the risk is the liquid bucket, where the investor is really looking to park money for a short term, e.g. liquid fund, money market fund or overnight fund category. The largest pool in the middle, are the people who are looking to replace their fixed deposit, where they want to minimise risk and have the benefit of mutual fund over fixed deposit, which is to give some amount of liquidity with a reasonable return. There we have been advocating for the longest time that you should have AAA or government security type of product, with maturity and tenure which is at the shorter end, because you don’t want to take too much duration risk. For those who are looking for higher returns, you can take risk either through credit risk or duration risk, with multiple products available for those two strategies. The moment you go into that last bucket, you have to accept more risk.
As we know, SEBI has allowed side-pocketing.In cases of major credit events, should fund houses sidepocket such investments? If no, then why shouldn’t they side-pocket, and if yes, how is it going impact investors (both new and old) and that fund?
We support side-pocketing as a tool that helps in keeping things fair for both old and new investors. Since side-pocketing allows for the segregation of bad assets and marking them down at a price, the investors will benefit if eventually the resolution of the assets is at a better rate, or they lose if the eventual outcome of the assets is worse. Additionally, new investors from the next day are not impacted by these bad assets and tracking these separately also makes it transparent and fair for both set of investors. Side-pocketing also keeps the fund intact in terms of offering a fair value to both old and new investors.
What will be your growth strategy and do you see any consolidation in the asset management industry?
In India, financialisation crossed the 50% mark as people have realised that real assets, whether it is real estate or gold, have not been as rewarding as the opportunity from capital markets in general. They have also understood that mutual funds is a very efficient way to pool in capital and channelise the investments creating a win-win-win for everyone. However, there is still a long way to go. For the GDP-to-AUM ratio even to come close to global averages, we have to grow 5 to 6 times. AMFI just released a vision document, where the vision of the industry is to grow four times over the next 10 years from 25 lakh crore to about 100 lakh crore. Clearly, as a serious player in the ecosystem, we would want to do a better job, so our growth aspirations is to be faster than the industry and continue to grow the market share. To achieve this, IDFC AMC will focus on three core areas: well-designed, performing products; a convenient investing process; and simple easy-to-understand communication for our customers. We are investing in our fund management capabilities, technology, sales team as well as the sales technology. We are also focusing on expanding our distribution by leveraging technology to serve our distribution partners as well as to enhance the end-investor experience by using analytics and website and digital technologies.
After rationalisation and categorisation of the schemes by SEBI, there seems to be various categories where IDFC Mutual Fund is not present yet.
"Key to asset allocation is to choose the right asset class to invest in and allocating the right percentage of the total investment to each asset class."
Can we expect IDFC MF to launch new funds in the recent future?
We have to be very thoughtful about how we are constructing our products and in what market environment is it the best time to offer it. While we would like to have a product in each of the available categories, we would not want to rush into launching a product without proper product construction and definition. We work with our partners to find out what are the gaps, if any, in the market that they want us to work on. We do recognise that we have opportunities for product expansion and have a fair amount of room for growth. However, it is the function of the market opportunity and what the market is expecting of us. We will look at launching new products at the appropriate time.
Financial planning these days is still emerging and even many fund houses are promoting the same. So, do you think a person should invest with a financial plan in place or should heinvest in the best performing funds?
The starting point needs to be a clear definition of your goals or investment objectives and then building the steps required to fulfill those objectives. Do the calculation to find what you need to do so that you can meet the goals and then build your financial portfolio. Just by chasing the last best performing is proven as a wrong strategy. Typically, when putting together a plan, you should focus on various asset classes as it generally leads to better outcome.
What are your thoughts on asset allocation? Should one go for strategic asset allocation or tactical asset allocation? Also, should you dive deep and rebalance based on sub-asset classes like large-cap, mid-cap, small-cap, etc. or should you keep it simple based on broader asset groups like equity, debt, gold, etc.?
It is an individual-led decision, where it depends on how involved the investor wants to be with the portfolio. It will also depend on how important a specific goal is to that investor. For some investors, their retirement goals will be paramount, while for someone else, it may be their child’s education. Also, the commitment needed in terms of time would differ from investor to investor. If an investor has the time to go down multiple levels of refinement, then they should. However, at the end of the day, it should be based on the investor’s needs. The best asset allocation is the one that looks to maximise returns with minimum risks in line with investors profile and objectives. Key to asset allocation is to choose the right asset class to invest in and allocating the right percentage of the total investment to each asset class as different assets perform differently in a different market and economic conditions.
In your opinion, how should one approach index fund? Should it be considered as a replacement for large-cap funds?
In countries like the US, most investors are seeing that active fund managers are no longer able to beat the index, hence they don’t see value in paying the fund manager. Low cost and passively managed index funds make more sense for them. In India, however, it does not stand true, since fund managers have been able to handsomely beat the market across cycles. The current cycle, where most fund managers have found it is difficult to beat the index, has got people talking about going the passive management way. However, if you look at a longer investing period, you will see that these very fund managers have done well. Hence the case for investors selecting index funds is not yet conclusive. Depending on the need of the investor, they should choose how they would like to allocate their funds. While we still see value in alpha generation, passively managed index funds have also grown in demand as we have seen a lot of flows in index funds recently, especially from small ticket investors.
Recently, we witnessed a market correction. According to you, how long would it continue and would it have a major impact on mutual fund investors?
We do not speculate on market movements. However, if we look at the data, the retail investor flows are reasonably strong with the SIP numbers growing. Secondly, in our opinion,the valuation and earnings forecasts look like the market today offers far better value than any time in the recent past. It then comes down to personal conviction and risk appetite, and if both are positive, then continuing to invest via SIP is a smart way to invest. With SIPs, when the market is down, you are buying more units, hence adding more value to your portfolio for the long-term.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.