MF redemptions to signal mkt bottom: Lotus India AMC

Ajay Bagga, CEO of Lotus India AMC said the markets are going through a prolonged correction. Globally and domestically, oil prices and oil price induced inflation are the first two issues followed by the global credit crises.

He said, "There is hardly any redemption pressure on the mutual fund side; I think when you start seeing redemptions happening, that’s when you would say that maybe the market is approaching a bottom."

Excerpts from CNBC-TV18's exclusive interview with Ajay Bagga:

Q: How do you read the fact that the broader market has begun collapsing in the last couple of days?

A: I think we are in a prolonged correction in the markets. Things are not looking good domestically and globally; oil price and oil price induced inflation remaining the first two issues followed by the global credit crises. There was a lot of talk three months back where a lot of renowned commentators and fund managers internationally came out and announced that the worst of credit crises is over and now people are throwing in the towel and saying that probably we have just written-off USD 400 billion out of a trillion or USD 1.3 trillion. That’s a John Paulson number and he was very much correct on the Wall St last year when he was shorting the sub prime and he made a lot of money off that and if he comes out with USD 1.3 trillion, I would listen more to him than people who have been past great forecasters.

So global cues are pretty poor, foreign markets and India are suffering the most in terms of outflows, in terms of sentiments and on top of that we have to factor in the political situation because if you are talking of an October-November elections things are going to move fast in the next two months because the government will be sitting with the Election Commission and figuring out at what point what announcement needs to be made if you are looking at an October-November election, which will have a pall of gloom over the markets as well.

So overall both global and domestic situation are not very conducive for the markets; unfortunately till now we have not seen the full capitulation happening. There is hardly any redemption pressure on the mutual fund side; I think when you start seeing redemptions, happening that’s when you would say that maybe the market is approaching a bottom. I have not seen all that; still very steady, a very small but steady net inflows happening and people are saying maybe this will be like 2004-2006. What might surprise us is maybe it’s more like 2000.

Q: Coming to debt funds and whether that might be the more interesting space to look at in, are you even seeing more interest there?

A: Yes, if you see months to date, about Rs 9,000 crore has come in the Fixed Maturity Plan (FMP) segment. Money has flown out from the long-term bond funds because it is trending upwards. Long-term bonds are not very favoured right now, but there will be a point where people would forecast that interest rates are looking toppish and at that time we will see quite a lot of interest coming back in long-term bond funds.

We saw that in 2001 Q1 onwards and it was a great bull run for bond funds till about April 2003 and then over the next one year most of that money went off as the ten-year went from about sub-5% are back to about 6-6.5%.

But right now what’s selling is the FMPs and short-term bond funds and I am sure fixed deposits are seeing quite a sum in flow; there is a run back into safety and on the mutual fund side we are seeing that last three months it's been about Rs 1,000-1,100 crore of net equity inflows and that’s largely made up of Systematic Investment Plan (SIP); Rs 30-35 lakh SIPs at an average ticket size of Rs 2,500, that’s what making up most of the inflows and probably those are the guys who will make good money on a three-five year basis because they are resolute. But more than that, inflows are down but good thing is inflows are coming into the fixed income segment and that will accelerate as this year goes on. 

Q: How much would we be getting from FMPs right now post-tax, post-indexation?

A: On a one-year FMP, you can make a gross return of about 960 and if you take 10% indexation you could add up with about 860-870. On three months, you could make anything from 930-950 and these are good AAA portfolios with no real estate and no financial exposure. So if you can go down and take more credit risk, of course the illustrative yields would go up even further.

But FMPs are looking attractive and on post-tax basis they are much more superior to fixed deposits even though they are not assured return and they do not enjoy bank deposit insurance, they are not bank deposit. So we are not saying anywhere that customers should look at that. But on post-tax basis with a bit of risk they do give much superior returns.

Q: Not so much for the vanilla diversified, but for some of the sector specific funds, are you hearing or seeing any redemption yet?

A: Very tough to say because these numbers are aggregated and probably at the end of the month one could give a better analysis on that. But overall if you are sitting on losses, you stay invested, but very few people have the courage to book losses and go out unless it’s a real capitulation. I think all that happened in the market in January-February, but inflows were huge so that got mass Rs 4,000-5,000 crore went off on the redemption side but there were enough inflows.

Now it’s become flattish where people are more resigned. Also there has been a mutual fund culture for nearly 15 years now and people are seeing that this is also part of the cycle and we have to stay put. That’s what we are finding with lot of the mutual fund investors, but no longer do you see people coming in that 'I want to average in or I want to reduce my cost of holding'. I think that has stopped, that was quite predominant in January-February because people thought it is more like 2004 and 2006; short-term correction followed by redemption in the upward direction of the market.

Disclosure:

It is safe to assume that my clients & I may have an investment interest in the stocks/sectors discussed.

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