#BQMutualFundShow: Why Debt Should Be An Essential Ingredient For Your Portfolio
Invest in both equity and debt, or in categories like balanced funds, advises ICICI Prudential AMC’s S Naren.
Mutual fund investors should invest in both equities and debt to get the most out of their portfolios.
That’s the advise ICICI Prudential Asset Management Company Chief Investment Officer S Naren offered on BloombergQuint’s Mutual Fund Show.
Our view is to invest in both equity and debt, or in categories like balanced advantage, because of the way the market valuations are at this point in time.S Naren, CIO, ICICI Prudential AMC
Equities are not a zero-risk asset class as what many people think, said Naren, adding that "volatility is healthy”. The returns from Indian markets will be lower in the second half of this year, according to the nation’s largest money manager.
Watch the entire conversation here:
Here are edited excerpts from the conversation:
What should an average investor do?
An average investor should just focus on asset allocation and volatility is an integral part of financial markets. If there is no volatility then there won’t be any need for fund managers, no one will see television channels and there will be no need for wealth managers. Volatility is healthy, and it is a part of the markets.
We were trying to tell people post Diwali that they should invest in equity and debt and not to forget the role of debt in capital protection. Equity is not a zero-risk asset class as what many people thought it to be. I think 2018 has proved that there are risks.
I reiterate that investors should invest in equity and debt.
Also Read: How Can Investors Prepare For Volatility?
Do you think we are closer to the end of the cycle or are we in the middle of the cycle?
The market did resemble an end-cycle in December and January. But after the volatility, the market has gone back to resembling a mid-cycle and people are more cognizant of risk. In December 2017 and January 2018, people had forgotten the word ‘risk’. That period was somewhat reflecting an end-cycle.
I am still looking forward to earnings growth. It may come in the next 12-18 months. It keeps getting delayed. People thought earnings improvement would start from the March quarter. Now, people are saying it may take more time.
So that’s a positive because the moment earnings growth comes, maybe you have ticked all the boxes for an end-cycle. So, we are still hoping for an end-cycle earnings recovery, which is yet to come.
With this move from an end-cycle to a mid-cycle, are you talking about an intermediate correction or the return of volatility or the fact that people recognize that equities are also fraught with risk?
A lot of people across the country now say that equity is not a low-risk game. Whereas in December-January, most people questioned the returns that one could receive in the debt market and said that the amount of returns that the debt market gives in a year is the same as what the equity markets give in a month. These kinds of statements are being made and you could see it in the flows. Flows started touching Rs 20,000 crore a month in that period in the mutual fund industry. People are a bit more cognizant of risk now, which is very healthy.
Have the nature and quantum of flows changed in February?
Actually, not significantly. My sales team was saying that there would be a small dip but the dip is not significant. Last year’s base impact will remain good for the next two to three months.
It is in the second half of this year that your one-year returns are going to be lower than what it is now. So, that is the time when you have to worry about the flows. The near-term flows do look okay.
What are you asking investors to do? Is debt the name of the game currently?
We are telling people to look at categories like balanced advantage, equity income and the likes and also to invest in debt, particularly the low-duration credit accrual kind of funds and not the long duration funds. So, it would be the old strategy plus debt investment rather than just investing in debt.
What is the difference between long duration fund and short accrual kind of funds?
Long duration funds are funds which invest in 10-year government securities to 30-year government securities. Those kind of products, we think, will be volatile in the next 12-18 months, particularly with global yields going up. So, we think that they are very good SIP funds because they will be volatile over the course of the next 12-18 months. But the long-term outlook is good.
In accrual funds, you have categories like credit funds where we don’t take big duration risks. We invest in ‘A’ or ‘AA’ kind of papers. We think those products have a good potential at this point in time because yields have gone up sharply. So, the yield-to-maturity on some of these categories is much higher than what it was and these are the kind of products that we are recommending.
You can say that if you are invested in debt funds you could have made returns and not in equity funds. But it is impossible to time such a thing.
We don’t say don’t invest in equity. But we always tell people invest either in categories of balanced advantage or invest both in debt and equity. When the asset class is meaningfully undervalued then at that time you can just chose to invest in that asset class. We all agree that equities over the course of the last six months have not been cheap.
When the markets are not cheap, then just investing in one asset class called equities isn’t something which we recommend. If equity becomes a dirt-cheap asset class like 2008 or 2013 then it could have been wise to invest just in equities.
So, our view is to invest in both, equity and debt, or in categories like balanced advantage because of the way the market valuations are at this point in time.