India’s Largest Mutual Fund Says Time To Focus On Risk And Volatility

A trader works on the floor of the New York Stock Exchange (NYSE) in New York, U.S. (Photographer: Michael Nagle/Bloomberg)

Written by
Niraj Shah
Written by

Niraj Shah

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The time is right to bring the conversation about risk and volatility back on the discussion table, according to the head of India's largest mutual fund by assets.

Investors seem to have all but forgotten about them and are relying on the TINA (there is no alternative) factor in equity investing – be it via mutual funds or direct investment in stocks, Nimesh Shah, managing director and chief executive officer at ICICI Prudential Mutual Fund, said on BloombergQuint's The Mutual Fund Show.

These factors become more pertinent as the market goes higher, he cautioned. “The market is expensive, even if it's not in the bubble territory.”

Shah advocates investing money in balanced funds which provide a mix of equity and debt and sees investments in the category becoming a trend in the coming three years.

Here are edited excerpts from the conversation.

While 2017 has been a great year, there's always a possibility that 2018 might not be as great as 2017. There is always a possibility of downside, so people must keep this in mind before investing?

We are getting into an expensive market, it's not a cheap market anymore. So, 2018 will be a time of investing, when the markets are relatively expensive. We at ICICI Prudential believe that it's an expensive market but not a bubble market.

For new and old investors, would it be prudent to assume that volatility will be a big factor in 2018, something that has been absent in almost all of 2017.

While we say that there are many investors coming in, 80 percent of our assets under management (AUMs), or our new sales come in from existing customers. So, in terms of customer acquisition we have a long way to go. People have forgotten that equity is volatile. We have been trying to educate people on a continuous basis that it cannot be a one-way street.

Do you think mutual fund investors should be wary of valuations and be prepared for a different kind of asset allocation strategy, if possible?

One basic thing is till 2016, the markets were relatively fairly valued. 2017 onwards, valuations have gone up. We have an internal valuation index that considers the price-to-book ratio and various other factors of the market at that point of time. Whenever you buy into expensive stuff, we have seen the three years return. When the index is where it is today, in the next 3-5 years the returns will be moderate because people are looking at 25-30 percent returns in the last one year. They cannot extrapolate it further, despite profitability.

Shouldn't mutual fund investors have a different thought process, as compared to pure play equity investors, who come on air and speak about how there is no alternative to equities, because real estate is dead and gold is not what it used to be.

I am a firm believer in asset allocation. I don't think the purpose is very different as everyone is interested in wealth protection. There is a psychological barrier of 7 percent. When the interest rate on a three-year deposit hovered around 7 percent and went below that, I have not been able to explain that today's 7 percent is better than the 9 percent because when you were getting the latter from the bank FD, inflation was 11 percent. But today inflation is 4 percent.

If I can request you to tell us the nature of the balance advantage fund. Would it invest a certain corpus strictly into equity, certain portions strictly into debt, and does it still satisfy the tax advantage an equity fund gives?

Taxation law in the country says that if 65 percent is invested in equity or equity related instrument, then it becomes an equity fund. Firstly, we fundamentally decide based on the valuation level, what should be the equity levels. In February 2016, when the market was low, at 23000, the equity levels of this fund was as high as 77 or 78 percent. Today when the markets are at this level, the equity levels are only 37 percent in this fund. But to qualify for a taxation advantage, I need to have 65 percent into equity related instruments. But the remainder is invested in equity today, 30 percent is invested in arbitrary funds.

Watch the full interview here.