Redemptions from equity funds suggests greater investor awareness: PGIM India MF

When equity markets are at all-time highs, it’s crucial to review your asset allocation. Union budget 2021 is just a few days away. In this backdrop Ajit Menon, Chief Executive Officer, PGIM India Mutual Fund, shares his views on various issues with Moneycontrol’s Nikhil Walavalkar. Edited Excerpts.

 What are your expectations from Budget 2021?

We see budgets as non-events from industry and country point of view, since reforms have happened outside the Union Budget too. The Healthcare sector may get a lot of boost, given the challenges we have seen in 2020 due to COVID-19. For mutual funds, we expect the budget to create a level playing field with other financial services. For example, all retirement products offered by mutual funds should get tax benefits as are enjoyed by other products.

 Why are you launching a balanced advantage fund (BAF) now?

Investors are expected to invest in equities when the markets are low and sell when indices are at a high. In reality, it happens the other way round. A BAF helps investors buy low and sell high in a tax-efficient manner and achieve a smoother experience of earning better risk-adjusted return compared to other mutual fund schemes. Our BAF does not allow the fund manager to decide the asset allocation; the price to earnings (PE) ratio is considered. And to make it more robust, our fund uses rolling average of PE.

In fact our model also alerts the fund manager in identifying opportunities when investing lump-sums in equity makes sense because markets are attractive. Such events happen once in five years and spotting those helps earn superior returns.

 You recently changed the investment mandate of a Europe-focused international fund to an emerging market theme. Why?

Investors look for a diversified offering to invest overseas. A country or region or theme focused fund does well over a certain period of time. But at times thematic products become volatile. Investors prefer a diversified scheme while investing overseas, as the fund manager can decide where to invest the money.

Since the US Federal Reserve changed its stance to average inflation and average unemployment, it is expected to hold interest rates low for a long period. This should ensure liquidity moves into emerging markets. Emerging economies have handled the pandemic relatively better than developed ones. They have been fiscally more prudent.

These markets have many scalable businesses. And they are going to be the biggest consumer base going forward. That is why a diversified emerging market equity fund made sense.

Investors also responded positively to this change as the assets under management of this fund now stand at Rs 90 crore compared to the Rs 3 crore that it was at the time of change of mandate.

 Many youngsters wish to directly invest in stocks. Many mutual fund categories have failed to beat benchmarks. What makes investors go for stocks directly?

Many experienced loss of income and job loss, leading financial anxiety. As markets bounced back, the typical reaction is to make up for the losses quickly by trading in stock markets since they had time on hand. Better digital infrastructure and tools further facilitated investors’ trading in direct equity.

Redemption from equity funds is a sign that investors are booking profits as markets touch new highs. It shows that increasing awareness. They may still make mistakes while timing their entry into and exit from the markets. But, at least, there are attempts to book profits when markets are at highs.

Though stocks are meant for long-term investors – typically more than five years – many prefer to speculate in stocks. The average holding period of mutual funds is less than three years. Mutual funds are meant for investors looking to achieve long-term goals.

 Low returns from fixed-income investments have made some investors switch to equity funds. What is your advice for them?

Since the Reserve Bank of India started targeting inflation and brought it down structurally, earning positive real rate of return (nominal return minus inflation) should be the focus of the investor.

Investors should not chase high returns. Asset allocation is important and investors are better off diversifying across asset classes. Also diversify within the asset class.