Amid geopolitical challenges ranging from the Russia-Ukraine conflict to rising oil prices, volatility may persist in this fiscal as well. In such a situation, mutual fund investors can opt for asset allocation funds that span investments across categories, according to veteran fund manager Nimesh Shah.
The next 12 to 18 months will be extremely volatile for Indian markets due to global turmoil, Shah, managing director and chief executive officer at ICICI Prudential Asset Management Co., told BloombergQuint's Niraj Shah. But heightened volatility could benefit mutual fund investors as certain schemes can time the highs and lows better, and provide gains as well as tax benefits, he said.
Unlike FY22, this fiscal is starting on the back of a “market broadening”, which should provide fund managers opportunities to outperform, said Shah. “In a broad rally, mutual funds always do well.”
According to Shah, asset allocation funds are the best option for FY23, as it factors in the volatility and enables portfolio diversification.
Instead of bracketing stocks as large caps, mid caps and small caps, Shah prefers to focus on value stocks irrespective of market cap, though he admits to being slightly biased towards large-cap stocks given the “better risk-return reward”.
Shah is upbeat on the Indian economy, which he considers to be well-placed to manage challenges, including currency fluctuation and higher oil prices, as we are less vulnerable in terms of revenues and forex reserves.
Watch the full interview here:
Here are the edited excerpts from the interview:
At the end of FY21, many thought that the volatility was over and FY22 might be a normal year; we got anything but a normal year. As a mutual fund manager and investor, what are the key learnings for you?
Nimesh Shah: Actually, mutual fund investors should be super happy this year. I'm saying that not only because of the growth of the market, but also because of the broadening of the market.
Exactly a year ago, I was trying to explain that the rally in the markets is quite a narrow rally. There are 10 stocks, and those stocks have given so much return as compared to the rest of the stocks, and the rest of the market is lagging behind.
This year has been a year of market broadening and there's a broad rally across stocks. Mid caps have done better than large caps; small caps have done even better. So, those quality names which were doing well earlier, say in 2018-2019 and 2020, have not done well in 2021-22, and the rest of the market has really picked up. Mutual funds and their investors would be very happy.
Mutual funds are diversified instruments by nature, so in a narrow rally, they never do well. In a broad rally, mutual funds always do well. That's the beauty of this year. For mutual fund investors, this would be a much better year than the years before because their funds would have done better. Broadening of the market is the single-most important theme that I will talk about for 2021-22.
Volatility, as I said last year, has just started. Volatility in the Indian markets will only increase the levels at which we are today, the levels at which the rest of the world is, and what is happening in the rest of the world is going to bring in a lot of volatility.
The standout feature of FY22 was the broadening of the market. But for you, who also invests in mutual funds, what was your key learning for FY22?
Nimesh Shah: Over the last 10 years, I have been talking about volatility and how mutual funds should gain from it. I'm happy that the whole market is talking about it.
Even 10 years ago, I would talk about Balance Advantage Funds. If you see its performance, it is so satisfying that after taking substantially lesser risks, the fund has given a good customer experience; it's way beyond our expectation.
The success of Balance Advantage Fund in the last one year or the years before that clearly shows that a mutual fund has to be alert to what is happening in the market. You cannot have stagnant equity allocation, irrespective of what is happening in the market.
In the last two months, when the markets corrected to 53,000, the asset allocation in equity should have gone up and debt component should have come down. When markets approach 58,000, then the equity allocation has to go down. That principle is established.
I am happy that the mutual fund industry has gotten into Balance Advantage Funds. Earlier, I was the only guy talking about it. Now, whichever advertisement you see or mutual fund house, it's satisfying that the industry is talking about it. This category will become bigger than the equity category in mutual funds.
Volatility is expected to only increase from here. This category will become very big. The levels at which the markets are already, it might be that you can make money out of volatility and not necessarily money out of holding. Just because you hold some stocks, it is not necessary that you make money. But if you have a tax-efficient structure like a mutual fund, and there is volatility and your scheme is supposed to trade in that volatility, then it can be a very good instrument.
Is that how you foresee FY23?
Nimesh Shah: The next 12 to 18 months will be extremely volatile because of various global reasons – whatever is happening in the Ukraine-Russia front or in the U.S. Because of the external world, there is going to be a lot of volatility in Indian markets, and we need to learn. The last six months have been unprecedented.
If somebody would have told you that in six months' time, FIIs are going to sell Rs 2,40,000 crore of equity, and we will still be at 58,000, you would have said I have lost my mind.
Even in this month, if you see the kind of flows that are coming, mutual funds have withstood all the selling of the FIIs. I think it's only DII vs FII which is going on in the market.
At the levels at which we are right now, there is no issue in India. India is doing well. Overall, with the oil prices at (the level) which they are, I don't see a serious issue.
There will be adjustments, some companies will not make money or make less money, or grow less than envisaged. That will be internal. But macrowise, even after oil prices at current levels, Indian macros are not extremely hassled. That's a positive trend. We are comfortably placed as far as India is concerned, but volatility will come from the external world and it can come in a big way.
Are you comfortable with the dollar at 110, because some people believe it will cause India to either overshoot the fisc or compromise on the capex?
Nimesh Shah: I'm not saying that I am comfortable. Of course, it is an effect. I'm saying that India has the strength to withstand that, unlike earlier when we used to get worried with our forex reserves, our ability to generate tax revenues, increasing GST revenue, and increasing direct access revenue.
Both on the fiscal as well as current account side, we have the strength to withstand the dollar at 110, unlike what had happened in earlier rounds where we were vulnerable. We are no longer vulnerable to that extent. Definitely, it will affect us as a country, but not to the extent that it would have had it happened three or five or 10 years ago.
If volatility is going to be the name of the game for the next 18 months, and if the broadening of the market has already started, Balanced Advantage Funds might be the primary criteria. But if one is looking at a pure equity fund and a simple bifurcation between large cap, mid cap, small cap – I can throw in a flexi cap as well – what do you reckon is a better bet for an investor who's willing to bet right now and hold it for the next three to five years?
Nimesh Shah: Actually, mutual funds have got a huge category – whether you call it large and mid-cap category or whether you call it flexi cap category – mutual funds have that option.
Within that, I prefer large caps as right now, it looks like a better risk-return reward. Always give flexibility to the fund manager that when the world changes, they are able to change with that.
I prefer giving flexibility to the fund manager across capitalisation. Don't restrict them into schemes which have got a fixed capital. Always go for flexi cap in that category. There are a lot of possibilities within that.
Value funds can also be flexi funds. Say, there is a value fund whose stocks have not done well over the last five years, but over the last one year, they have done very well. We have a value fund which was not doing well till 2019- 2020, but which is doing exceedingly well in the last two years since Covid-19. That is the segment that has come alive again. So, even in a value category, you can go across market capitalisation.
ICICI Prudential is focused towards large cap than mid cap and small cap, because some of the valuations have run up. But again, it is a stock picker's market. Within industries, there are a lot of value picks available. I am moving towards value rather than being fixated over which market cap to go for.
If you were to make a bifurcation between asset classes, and if somebody is not putting money in a multi asset fund but choosing to allocate individually, what is the right allocation between equities, debt, commodities, and maybe even global equities – presuming that at some point, you will be allowed to start investing in it again?
Nimesh Shah: We have launched a Passive Multi Asset Fund. I have the choice of investing in Indian equity, foreign equity, debt, etc. There is a lot of flexibility across asset classes, and I invest in those ETFs.
It gives a tremendous amount of flexibility based on the levels of the market. We have invested around 50% between equity and international markets – around 30% plus is in equity markets in India, and around 20% internationally. My numbers are somewhat less accurate, but around 50% is in Indian and foreign equity, and 38% is in debt. Some part of it would have gone to gold.
It is time to give flexibility to the fund manager over the next two to three years to invest across asset classes. That flexibility is also available within fund of funds. So, fund of funds are a very important category.
Earlier, we used to toggle in a thing like the asset allocator fund between equity and debt. Now, we have the choice of toggling between international equity, Indian equity, gold and debt.
It gives complete flexibility to the fund manager where they want to allocate and it is very clear in our passive asset management fund.
The fact sheet will be out tomorrow and the disclosures. You can see how we are distributed among various asset classes.
Do you reckon that 50% into equities, and out of the remaining 50%, some into debt and some into commodities is a good allocation?
Nimesh Shah: (We have invested in) International equity because of the state at which Indian markets are. Indian markets are at an 80% premium to MSCI. So, the rest of the emerging market is quite cheap; the rest of Asia is quite cheap. If our forward PE is at 20, for MSCI, the forward PE is 11.
Today, it is about diversifying across countries. Why should we put the entire money into India itself when other countries are available relatively cheaper?
That is why I feel that the Passive Multi Asset Fund is a very good category. During the year, we have created a series of products where you can do asset allocation in a tax-friendly manner.
Investors should understand fund of funds categories. It will require basic common sense. You don't have to be a financial wizard. You will see where the fund manager is allocating the monies.
Interest rates are rising, so debt markets are not very easy to invest in. When people want to park money for a shorter period also, we say floater interest rate is the best possible. In a rising interest rate scenario, where you do not have a clear duration call, it is important to invest in floater interest rates.
In debt funds, we have a scheme called the ICICI Prudential Floating Interest Rates. That is very interesting in the scenario that we are in today, and it might be the right place to invest.
In the debt category, one has to be alert and only (opt for) floating interest rate type instruments.
You have consistently come up with thematic funds – a couple of years before they caught everyone's fancy – and they've given good returns in the past. As a fund house, what are the themes or sectoral funds where you believe people should actively look at investing in, whether in the form of SIP or lump sum?
Nimesh Shah: Why do we come with so many thematic funds? We believe that mutual funds or fund of funds are a great way of investing in thematic funds. I have launched something called a Thematic Advantage Fund. It has a good track record.
Suppose you have a view on a sector that it should do well, perhaps the banking sector. The investor has to take the decision of entry and exit. And when he exits, suppose he invests in two months' time, the returns come in two-three months' time and you will have to pay full capital gains tax on it. Short-term capital gains will have to be paid on that.
We have launched a Thematic Fund of Funds where we will decide which themes to invest in. We will invest in those categories that are within the company. So, I have all the themes in the company.
Banking is a good space to invest in because private sector banks are beautifully placed. Their balance sheets are clean and the credit cycle will come round. Even if interest rates rise, private sector banks will be able to manage NIIs well. They have got a huge market to be taken from the overall banking system in the country. So, if we believe that, then there will be a huge allocation in Thematic Advantage in banking funds itself. Suppose banking does very well over the next two months, I can decrease the weightage of the banking fund.
Themewise, we like our pharma fund. We came up with the pharma fund after four years of underperformance. Pharma had not done well from 2016 to 2019. Then, we came up with this fund and it has done well. After a bad cycle of commodities for four to five years, we came up with the commodities fund, which has given amazing returns in the last two years.
For an aggressive investor who wants to invest in equity and themes, there is nothing better than the Thematic Advantage Fund. It's a fund of fund which invests in themes, and we will decide the entry and exit point. As fund managers, we have created some internal models.
I like the banking sector today; it has corrected a lot. Auto is another place which has not done well in the last two years and is another sector that we like. We also like housing and believe that real estate is going to do very well. For seven to eight years, real estate has not done well. In the last one-year, real estate has started picking up. Inventory in the country has gone down big time. Unsold inventory is at an all-time low. We like everything after underperformance.
Either you go and invest on your own in houses, but if you don't want to do so, you can invest in the ICICI Prudential Housing Fund. It will not only invest in real estate companies, but also in whatever goes into housing – including cement, steel, various industries that benefit from housing growth in India, and banks which do great business from lending.
Overall, it's quite well-diversified because you get banking, steel companies, and various sectors including cement which is expected to do well. All those sectors are present in the fund. It is a great opportunity. We launched the fund yesterday. For the next 14-15 days, the NFO is out to offer ICICI Prudential Housing Fund.
What is your key advice for mutual fund investors for FY23?
Nimesh Shah: Asset Allocation Funds, Asset Allocation Funds, Asset Allocation Funds. That's the message. This has not changed in the last so many years, and that continues especially for the year going forward because markets are not expensive. We are sitting on a forward PE of 20, with a lot of uncertainties around the world.
India is doing well. There's nothing wrong with India. But there are too many uncertainties around the world and India is at a substantial premium to the rest of the world. So, it is better to go for a series. Whether you take a Balanced Advantage Fund, Asset Allocation Fund, Passive Multi Asset Fund, or a Multi Asset Fund. We have created a whole category of funds which have various allocations to equity. Take your pick from that. But Asset Allocation Funds should be the mantra.
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