Lot of triggers for volatility, prefer stability of large-caps: ICICI MF MD

With a weakening rupee and a high current account deficit, export-oriented sectors look attractive, says Nimesh Shah

Nimesh Shah, managing director and chief executive officer of India’s largest asset management company, ICICI Prudential MF, and the newly-elected chairman of Association of Mutual Funds in India (Amfi), shares his views on how the MF industry can improve its risk-management practices against the backdrop of the IL&FS default. In an interaction with Jash Kriplani, Shah also touches upon redemption pressures the industry is seeing and where debt and equity investors can put their money in the current environment. Edited excerpts:

How do you see the equity markets doing going ahead?

For the next six-nine months, weak macros, domestic political environment and developments related to US economy will create a lot of triggers for market volatility. While the corporate profitability at the micro-level is improving, there are external headwinds that our economy is facing.

What could be the investment strategy in this market volatility?

Over last three years, we have been strongly advocating balanced advantage strategy. When the Sensex was down at 23,000-levels in February 2016, the equity exposure of our balanced advantage fund was as high as 76 per cent. On the other hand, when the Sensex was trading at 38,000-levels in the month of August 2018, the equity exposure in the same fund was at 30.13 per cent. Now when the market has corrected, our equity allocation has gone up slightly. So, this strategy of managing risks on either side of market excess has helped our investors.

What could be the strategy on the fixed-income side?

Since interest rates have gone up, we have been advocating investing in debt funds, particularly credit risk funds. We are managing this category very conservatively. A portfolio mix of credit risk funds and balanced advantage fund may prove to be a good investment strategy.

Which sectors look attractive in the equity markets?

Given the prevailing uncertainties in the market, we prefer the stability that large-caps offer. With a weakening rupee, a high current account deficit, export-oriented sectors look attractive to us. In addition, we also like power utilities and select oil stocks.

Is the industry well-placed on the liquidity front?

Towards the end of September month, fund houses were already sitting on sufficient liquidity owing to expected outflows on account of advance tax payments by corporates and the expectation of a rate hike by the Reserve Bank of India (RBI) in October. Hence, liquidity was not a concern and it is business as usual for us. The regulatory framework for the mutual fund industry is also pretty robust on liquidity front.

Does the MF industry needs to work on its risk-management practices?

Mutual fund structure is that of a pass-through structure. Lot of risks are already mitigated owing to regulatory caps set in place. The mechanisms put in place by the Securities and Exchange Board of India (Sebi) also lay down how fund houses can manage liquidity in their funds. Since 2008, there has not been any major issue on the liquidity front.

What about credit risk?

As far as credit risk is concerned, here is where fund houses need to be more careful and improve their risk management practices. While regulations allow a mutual fund scheme to invest up to 10 per cent of net assets in an individual security, a fund manager need not go up to 10 per cent even in a AAA security. It may be prudent to take exposure up to eight-nine per cent to ensure liquidity. For AA or A plus rated papers, the exposure can be kept even lower. For instance, don’t increase your exposure to a AA rated paper beyond five per cent or an A plus paper beyond three per cent. So, start calibrating your exposure downwards, thus avoiding concentration risk. Even if a credit event were to occur, the impact on the fund can be contained.

Do you see more redemption pressure going ahead?

On a monthly basis, at an industry level, we are seeing almost Rs 300 billion of gross sales. Despite market volatility, we have not witnessed redemption pressures or retail investors cancelling systematic investment plans (SIPs) at a fund house level. This is a very healthy sign which indicates that retail investors have matured, owing to better understanding about how investing via SIP will aid in accumulating more units during market corrections. Over the last four years, we have consistently seen more inflows whenever markets have corrected. 

What is your take on the cut in total expense ratio (TER)?

The mutual fund business is not a margin, but a volume business. As long as the investors have a good investment outcome with the mutual fund scheme, they will re-invest. Reduction in expense ratios is further beneficial for the investors and we believe that the overall volumes are likely to improve as investors will be increasingly attracted to this low-expense and transparent product. Currently, only 17 million investors have invested in mutual funds in India. This is much lower than the immediate potential of the industry, which is at about 100 million investors. If the industry has to benefit from this journey, more awareness needs to be created along with expanding the geographical reach. We are also expanding and opening new offices in interiors of India, where we didn’t have any presence earlier.

What would be some of your priorities as the new chairman of Amfi?

We need to find ways to smoothen the on-boarding procedure for retail investors. The paper-work should be brought down and all industry stakeholders must work towards making investing through digital a seamless experience for investors. Digital channels can also make it easy for distributors to scale up their businesses. We will also try to bring down the time taken to initiate an investment through systematic investment plans (SIPs) or other systematic investment modes. For the industry to grow, all industry participants including distributors must find the business viable.

Do you plan to launch any new fund offers (NFOs)?

We are looking at what can be done on the international side both in terms of product and business development. So far, international mutual fund products have not attracted much of investor attention. But, with the changing macro scenario one can look at international opportunities.