The low- down on which as­set class will at­tract the most in­vestors this year.

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The low-down on which as­set class will at­tract the most in­vestors this year

In the last few months, the econ­omy has been try­ing to get back on its feet, though with dif­fi­culty. In re­sponse, eq­uity mar­kets have also been volatile, strug­gling to re­tain the bullish sen­ti­ment. The in­tro­duc­tion of longterm cap­i­tal gains (LTCG) tax, ris­ing crude oil prices, strength­en­ing of dollar against the ru­pee and PSU bank frauds have hit sen­ti­ment. Bench­mark in­dices fell 8 per cent in Fe­bru­ary and March.

Amid the tur­bu­lence, the re­tail in­vestor has shown faith in eq­ui­ties As per data from the As­so­ci­a­tion of Mu­tual Funds in In­dia, or AMFI, the av­er­age as­sets un­der man­age­ment, or AUM, of mu­tual funds stood at ` 22.71 lakh crore at the end of March, with the eq­uity component be­ing 30-35 per cent. While sys­tem­atic in­vest­ment plan, or SIP, ac­counts stood at

over 2.11 crore, to­tal col­lec­tions in March were ` 7,119 crore. Seems like the ‘ Mu­tual Funds Sahi Hai’ cam­paign is work­ing its magic.

“Liq­uid­ity is good. We saw as­ton­ish­ing flow of money into mu­tual funds last year. This year also, the mo­men­tum in as­set growth will con­tinue, but the rate of growth will be slightly lower,” says A. BalaSubra­ma­nian, AMFI Chair­man and CEO of Aditya Birla Sun Life Mu­tual Fund. How­ever, he is quick to add that there have been some out­flows from eq­uity-ori­ented funds in the last two-three months.

An­a­lysts and fund man­agers say there has been a slow shift. “There has been some sell­ing in bal­anced funds and we are see­ing neg­a­tive re­turns there,” says Ra­jeev Thakkar, CIO, PPFAS MF. “There has been an out­flow from ar­bi­trage funds to the tune of ` 12,000 crore due to tax-re­lated de­ci­sions of in­vestors and profit-book­ing at the end of the fi­nan­cial year in March,” says Balasubra­ma­nian. In­flows into eq­uity funds in March were the small­est in 13 months even though they did not turn neg­a­tive.


Un­til last year, the trend was clear. In­ter­est rates were fall­ing. With real es­tate and gold not giv­ing good re­turns, in­vestors turned to mu­tual funds. But with in­tro­duc­tion of LTCG tax on mu­tual funds and in­fla­tion/in­ter­est rates ris­ing, in­vestors be­came wor­ried. Also, geo-po­lit­i­cal ten­sions and trade wars be­tween the United States and China made eq­uity mar­kets cool down slightly.

How­ever, SIP num­bers tell a bullish story. Fund man­agers say that de­spite eq­uity mar­kets turn­ing volatile, the SIP mode of in­vest­ing will gain mo­men­tum this year too. Aman­deep Cho­pra, Group Pres­i­dent and Head, Fixed In­come, UTI Mu­tual Fund, says, “A lot of flows into eq­uity mu­tual funds over the last 12 months are more or less long term (two-three years time frame) as they are mostly through SIPs. That trend will carry on. But in­cre­men­tal flows might get di­verted.” “Eq­ui­ties will ap­peal to in­vestors if the re­turn is up­wards of 12 per cent. But with LTCG tax, the re­turn dif­fer­en­tial is nar­row. Eq­ui­ties should at least give 3-4 per cent more re­turns as com­pen­sa­tion for the risk that one takes,” says Balasubra­ma­nian.

So, to jus­tify the risks the econ­omy poses, which as­set class is the Street point­ing to? Clearly, it’s not real es­tate or gold. Port­fo­lio man­agers say the wind is blow­ing to­wards fixed in­come as­sets.

The Come­back

In re­cent months, there has been a pick-up in flows into fixed in­come funds. Bank de­posit rates have also moved north. “One has al­ready wit­nessed mi­gra­tion from fixed de­posits to debt funds, the lat­ter demon­strat­ing that they can out­per­form fixed de­posits,” says Aman­deep Cho­pra of UTI.

In April, big pri­vate banks in­creased de­posit rates to around 7.35 per cent, from 6.50-6.75 per cent a few quar­ters ago. This makes fixed de­posits an at­trac­tive av­enue for in­vestors with low risk ap­petite. “Peo­ple can now look be­yond tra­di­tional fixed in­come prod­ucts like de­posits and se­condary mar­ket NCDs,” says Aman­deep.

Bala­sub­ra­manain backs this. “In the last two-three months, we have seen ` 10,000-12,000 crore come into short-term and medium-term debt funds along with credit op­por­tu­nity funds. These cat­e­gories are be­com­ing more at­trac­tive be­cause of ex­pected re­turns af­ter tax as op­posed to bank fixed de­posits.”

Out of ` 23 lakh crore AUM of the mu­tual fund in­dus­try, the eq­uity component is ` 9 lakh crore, while the debt pie is about ` 10 lakh crore, fol­lowed by ` 4 lakh crore of liq­uid funds. The debt fund pie, says AMFI, should grow at 20-25 per cent on a year-on-year ba­sis.

For con­ser­va­tive in­vestors, debt funds are un­doubt­edly of­fer­ing good value. But for young wealth cre­ators with a risk ap­petite, the route leads to eq­uity- ori­ented funds.

Why be bullish on se­lect debt funds?

Crude oil is near­ing the $80 a bar­rel mark. With in­fla­tion­ary con­cerns resur­fac­ing, bond yields have ral­lied more than 60 ba­sis points in just one month. Be­sides, the US Fed­eral Re­serve has sig­nalled an in­crease in rates, which may put pres­sure on in­ter­est rates in In­dia too. These fac­tors will not sup­port long-term debt funds. But they will work for short­term funds. “Long-term funds may un­der­per­form in the near term, es­pe­cially from a one-year per­spec­tive, due to ris­ing yields. But for short-term funds, the neg­a­tive im­pact of rates mov­ing up is muted and they will ac­tu­ally ben­e­fit. So, in­vestors should fo­cus on low du­ra­tion, short term and credit risk funds,” says Aman­deep.

While debt funds are work­ing their charm on in­vestors, why is the glitter of gold not vis­i­ble in these seem­ingly trou­bled times?

Has gold lost its sheen?

Gnanasekhar Thya­gara­jan, Direc­tor, Re­search, Commtrendz, says three months ago he ex­pected a dra­matic move in gold due to po­ten­tial geopo­lit­i­cal flare-ups and high in­ter­est rates and in­fla­tion. Un­cer­tainty com­pels in­vestors to buy gold as it is con­sid­ered a safe haven. “The dra­matic move has been elu­sive. It seems that US-Syria war or US-China trade fight are be­ing per­ceived as tem­po­rary. Eq­uity mar­kets are show­ing far more re­silience than an­tic­i­pated. But how long can they with­stand these? Bor­row­ing in dol­lars is not cheap, crude oil and in­fla­tion are ris­ing and so even though the in­ter­est in the metal has not risen much, gold will have to rally soon,” he says.

In the last three-four months, gold has ral­lied only about 4 per cent, and not at­tracted in­vestors as ex­pected. But Pramod Ku­mar Agrawal, Chair­man, The Gem and Jew­ellery Ex­port Pro­mo­tion Coun­cil, says, “Gold jew­ellery grew 10 per cent last fi­nan­cial year. This year too, it shall, con­ser­va­tively speak­ing, grow at 10 per cent".

In­ter­est­ingly, in March and April, de­mand from ru­ral con­sumers lifted the over­all sen­ti­ment. Thya­gara­jan says there has been a 15-20 per cent uptick in de­mand from both ru­ral and ur­ban con­sumers. But it seems un­likely that the re­tail in­vestor, who has shown un­flinch­ing faith in eq­ui­ties, will seek so­lace in the yel­low metal yet.

Mu­tual Funds sahi hai!

For con­ser­va­tive in­vestors, debt funds are un­doubt­edly of­fer­ing good value. But for young wealth cre­ators with a risk ap­petite, the route leads to eq­uity-ori­ented funds. “If you have at least a five-year view, build a strat­egy to in­vest in eq­ui­ties. Yes, large caps are at el­e­vated lev­els and small and mid caps, de­spite the cor­rec­tion, are over­val­ued, but the do­mes­tic story is play­ing out well in se­lect stocks,” says Thakkar of PPFAS. “Mu­tual funds are al­lowed to in­vest in overseas stocks and so one should also look at for­eign stocks that com­ple­ment hold­ings here. Among the FANG (Face­book, Ama­zon, Net­flix, Google) group, we like Face­book and Google," he says.

While 2016 was the year of low hang­ing fruits in the eq­uity space, 2017 was when in­vestors were re­warded rather quickly. But 2018 may be dif­fer­ent. Ac­cord­ing to a Mor­gan Stan­ley re­port re­leased in the first week of May, the bull mar­ket in In­dia is in­tact. It says the clear winners in April were mo­men­tum stocks, stocks with max­i­mum 12-month re­turns, low div­i­dend yield, high beta and high fi­nan­cial lever­age. This surely smells and feels like a bull mar­ket. So, if the macros stress you, volatil­ity wor­ries you or tax dis­suades you, re­mem­ber the prom­ise of an emerg­ing mar­ket like In­dia and that money, de­ployed well, would grow even at night!


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