The recent crisis in debt mutual funds has put investors on alert regarding the schemes they have made investments into, Srikanth Meenakshi, Co-founder and Chief Operating Officer, FundsIndia.com tells Moneycontrol in an interview.
"Investors are questioning portfolios of funds they already hold to check whether there is exposure to troubled groups or papers and whether these then need to be exited," Meenakshi said.
Established in 2009, FundsIndia is an online investment website headquartered in Chennai, Tamil Nadu. Owned by Wealth India Financial Services which was initially created only for mutual funds, it later introduced other investment products like stocks, corporate fixed deposits, and bonds.
Meenakshi said that investors also become wary with fresh investments; as they either want to stay away from debt funds or require assurances that portfolios are sound and steep net asset value (NAV) falls are not in the offing.
On the debt front, he recommended investments in liquid or ultra-short/low duration/ money market funds for those with a less than one-year perspective.
On the equity front, he suggested that new investors consider multi-cap funds which maintain a higher large-cap exposure to start with.
Speaking on market outlook, Meenakshi feels that factors such as earnings growth, economic growth indicators, inflation, and global developments can reintroduce volatility. Edited excerpts from the interview:
Q: Now that the uncertainty of elections is behind us, will the NDA majority help get inflows in the mutual fund industry?
A: There will definitely be a near term upsurge in terms of inflows into the industry due to the positive sentiment created by the emergence of a stable government and continuity of reforms. However, to sustain the surge and have a repeat of the industry performance in the last five years over the next five years, several things need to come together.
Policy clarity in terms of KYC regulations, cleaning up of the mess in the debt market (especially with PSUs), and supporting the growth of investment awareness are things that will aid and sustain the momentum created by the elections.
Q: Because of recent volatility in the equity market, most investors' portfolio slipped into the red and several investors stopped SIPs or withdrew from equity funds. What is your advice to them?
A: Once again, the market has rewarded patient investors. People who did not halt their SIPs would have reaped rewards with the market uptick in these few weeks leading up to the date of exit poll results and final results.
The lesson to be drawn, as always, is that equity markets are unpredictable in the short term, but reward the people who remain patient.
Q: With FMPs in trouble, do you think investors are cautious and refraining from investments in FMPs or debt funds?
A: Yes, investors are certainly much more cautious now. To start with, they are questioning portfolios of funds they already hold to check whether there is exposure to troubled groups or papers and whether these then need to be exited.
The wide access to news on fund exposure to stressed papers gives them an idea of what to look for. Investors also get wary with fresh investments; they either want to stay away from debt funds or require assurances that portfolios are sound and steep NAV falls are not in the offing.
If there’s one thing debt investors have learned, it is that debt is not with zero risks. Some steps investors can take to shield themselves from risks is to avoid funds with very high returns – they seldom come without risk, look quickly at the portfolio to check if exposure to individual top instruments is higher than 6-7 percent, and go for funds with larger AUMs.
For those who want to mitigate risk as much as possible, it is best to simply stick to ultra-short or low duration funds.
Q: For short-term investors, which category of funds looks attractive?
A: Short-term always means lower equity exposure. For those with less than one-year perspective, liquid or ultra-short/low duration/ money market funds will work. Funds in these categories run short average maturities. These categories, apart from liquid, are also suitable for more than a one-year timeframe, especially for those who are averse to volatility and risk.
For those with a longer two to three years horizon, short-duration funds are suitable. Equity savings or balanced advantage funds are other good options for such a timeframe. Including these low-risk equities, hybrid funds pay off post-tax, especially for high-tax individuals. Quick note – debt fund categories do not indicate the level of credit risk (apart from corporate bond and credit risk funds).
Funds with high exposure to low-rated papers, even if they belong to categories such as ultra-short or low-duration, are a strict no for short-term investors.
Q: Which category of funds are recommended to new investors in the present market scenario and why?
A: Assuming this refers to the equity market. New investors need to be cautious since volatility can put them off equity investing. While markets are trending higher post the election results, this does not rule out volatility further down the year. Factors such as earnings growth, economic growth indicators, inflation, and global developments can reintroduce volatility.
New investors can consider multi-cap funds which maintain a higher large-cap exposure to start with. The large-cap tilt will give stability and are also at the forefront of a market rally. Hybrid aggressive funds are another great option – they are at obviously lower risk due to the debt but still give equity participation.
The second positive about both these types of funds is that they still have some amount in mid-caps while being a moderate risk. This can help investors earn higher returns without taking on too much risk. Large-cap index funds are also an option new investors can consider.
Q: Will self-regulation of mutual fund distributors benefit investors?
A: We are very positive about the emergence of a self-regulatory structure for mutual fund distributors. An entity empowered with the development and regulation of distributors will help increase trust and confidence towards this industry in the country. Also, it will help distributors represent their viewpoints in a cohesive manner to the regulator. For the investor, the likely adoption of best practices and institutionalising of codes of conduct for distributors will ensure that they (the investors) get consistent, good quality advice for their investments.