The Mutual Fund Show: Find Out How Budget 2021 Affects Your Investments
The presentation of the Union Budget usually provides an insight into what the government is prioritising in the new financial year. This year, after the Covid-19 pandemic ravaged India’s economy, the need for a growth-oriented budget was felt more keenly.
With its focus on infrastructure, Budget 2021 struck the right chords, with industry veterans lauding the government’s vision and intent. But from an investor’s perspective, does the fiscal road map laid out by the government change anything in the new fiscal.
Is there a need to review long-term equity strategies and asset allocations? On this episode of the weekly special series The Mutual Fund Show, BloombergQuint spoke with Swarup Mohanty, chief executive officer at Mirae Asset Global Investments (India); and Kshitiz Mahajan, co-founder of Complete Circle Consultants; about changes to the investment landscape heading into the new financial year.
Watch the full show here:
Here are edited excerpts from the interaction:
From a normal investors’ perspective, what did this budget do and how should a mutual fund investor approach investing post-budget? Should there be changes?
MOHANTY: At the outset, we believe that the budget for FY22 continued from where it had left off last year, and higher allocations have been given to infrastructure, social spending and healthcare, rather than subsidies and that’s been a big change in this budget. The headline fiscal deficit stands at around 9.5% in FY21 and around 6.8% in the subsequent year, that is FY22. They seem reasonable to us, given the severe impact of the pandemic on the economy. See the revenue assumptions also seemed reasonable, the good part of this budget is that the numbers all look pretty feasible and they look pretty logical to us. Some argue that due to this increased spending and borrowing it would reflect poorly on inflation but I mean, the fact remains that there is never any harm in borrowing money to build your house which is the capex expenditure which this budget has laid down and we’re going to build a better country through the infrastructure as envisaged in this budget and there’s never anything wrong with that. The problem happens when you borrow money and spend it on your monthly expenses which are the revenue expenses—which are not happening in this budget. So, if you are going to sacrifice a bit of inflation for a growth-oriented budget, it’s always better. I do believe it was the need of the hour, I certainly believe that India needed this budget and given the condition or the pressure that was building up around all of us, what has come out is pretty good and is pretty strong I must say. So, all altogether, it is a well packaged budget and that’s what has led to the cheer in the market and the market is responding. It seems so many smiling faces around us. Now, in our view broadly the budget does augur very well for the equity markets, given the fact that it is a growth-oriented approach to the whole scheme of things in the next four or five years. We didn’t see any negative surprise on the tax front, which is also very good, but we would continue to monitor the execution of the budget. The planning has been done but the execution has to be ruthless and that’s something we have to watch out for. We believe that in the next few years India will be at the cusp of a multi-year, growth-oriented status. This would be driven by low interest rates which we are already in, there could be some changes there but don’t underestimate the RBI to come in and do the needful. It’s done such an amazing job during the pandemic and through buoyancy in the rural sector and we do believe there will be acceleration in manufacturing exports. What investors should do is something which they always try to do—is that to conclude on markets. If you go by the mutual fund flows over the last four or five six months, it’s as if people had concluded that the markets had peaked out and there would be a correction coming forward. Then this budget happened and that’s where people tend to go wrong, if their goals are met and they’re going out nothing wrong with it, but the more you try to time the market, the more you end up being wrong. So, the shift should be completely towards asset allocation and if the asset allocation deserves redemption so be it. But otherwise, the more you time the market, the more you will see the markets reversing from what you envisage it to be. Let’s look at it, we are on the cusp of changes on both sides. The equity sides are unfolding in a very different manner, what looks like a low interest rate regime in the shorter run can see some volatility and whenever there is volatility the fund manager comes in and there is a good play for the fund managers to then act on. Because in volatility always lies the opportunity. So, it’s a good time for investors to stay put but stick to asset allocation is what we will say.
Since the answers seem to suggest that on the equity side there are no issues, what about the debt side? Investors are looking at debt funds, is this a good time or can people be tactical?
MOHANTY: See, I always believe that you have the same investors who behave differently when it comes to equity and debt. When it comes to equity, they’re aware of the volatility and leave it to the fund manager to handle the volatility. That is not so on the debt side. The investor takes a call and that’s traditionally how the investor behaviour has been. If there is volatility the fund manager will play, and if there is interest rate movement, it will reflect in the portfolios already. I mean most of the fund managers will cut their positions on the YTMs already looking at the volatility. So, what this volatility now brings to the table is, it brings back the long funds which is typically the bank and PSU and the corporate bond fund. Remember, debt traditionally from a taxation perspective is a three-year horizon and we do believe that it’s a good time for both long equity as well as long debt to be invested in but stick to asset allocation and that’s key. Allocation always makes money and over allocation kills money.
A couple of things that have happened in the budget, and I would want your opinion on that. Two years ago, there was this whole shift, ULIPs got a big leg up as well. Recently, I saw a report that was on an insurance stock and the brokerage said time for the high-ticket ULIPs may be behind us. My question is, purely from a mutual fund investors perspective who may have been shown promise in ULIPs vis-à-vis mutual funds due to a variety of reasons including the ones which came two years back, do some of those reasons get nullified or is the benchmark number still too high and needs to be brought at parity, how do you see this?
MOHANTY: At the outset it’s not right for me to comment on ULIPs. But I do believe that every investment vehicle investing in a certain asset class should be taxed evenly. So, for the mutual fund industry clearly there was a disadvantage over ULIPs till now. I feel this change is good, it’s a good beginning, but we still have a long way to go as you rightly pointed out Rs 2.5 lakh is a large amount and in that I think the good part is the signal is that there is a correction in the way and it’s a good thing to see that. Because when you look at it broadly, the mutual funds comparatively are a very low-cost product and have better benefits in long-term compounding when invested for a longer period of time. These measures have reduced the arbitrage between mutual funds and ULIPs. I’m sure more steps will be taken in the future to ensure a level-playing field. The biggest issue still remains in the communication of both the products, we’ve always pointed this out that when we talk about mutual funds, we say mutual funds are subject to market risks, while insurance is sold with the saying that they are a subject matter of solicitation. These two statements have very different impacts on the investors, and all these vehicles invest in the same asset classes. So, it’s a good beginning but we have a long way to go.
The budget seems to be capex-oriented with a tremendous focus on infrastructure, a lot of people are believing that post-Covid healthcare will be the big buzzword... Purely from a budget perspective, I thought infrastructure was right up there. How do investors play such themes because there are very few infrastructure funds? I don’t know which quantum of funds have a large proportion of infrastructure within them—maybe some of your schemes might. Can you talk a bit about that?
MOHANTY: Actually, with or without the budget, our view has been that the four pillars of Indian economy lie on the four broad themes that is banking, consumption, healthcare and infrastructure. When you look at these themes, these are long themes which graduate over a period of time. Let me tell you that when we launched our consumption fund seven years ago, it looked like FMCG practically, but today there is no denying the diversity of the consumption fund. We launched our healthcare fund three years ago. It’s looking at pharma at this moment, but it is broad-basing itself to chemicals and we’ll see further broad-basing in the next four or five years and then doing justice to the term called healthcare. In my career when I started selling funds in the 1998-99, the portfolios read banks, then it became banking and financial. Today it is reading banking, financials and fintech. So, irrespective of any budget, these four themes are sacrosanct to the growth of India. If you believe India will grow, these four themes have to play out and as you rightly pointed out some of them are cyclical. I mean three years ago, healthcare was a screaming buy, today banking looks good buy. Of course, this budget brings a lot of focus to infrastructure. Our view at Mirae asset is that, as we played the three themes excepting infrastructure, we have three funds on the three themes. We’ve played infrastructure through our diversified funds and we will continue to do that because in the past infrastructure has flattered to deceive so we’ve stayed away from making it a fund but yes to be very honest this budget does bring infrastructure in the fore and we’ll see some structural changes happening in the country and when that happens, there will be an impact in the market, and we’d like to play through our diversified fund. But the other three themes are our core and we’ve played them over say launching a small-cap fund because we feel these portfolios structurally give you a better balance sheet than a small-cap fund. And alpha generation has been significant, the healthcare fund has almost been doubling money in the last three years. The next three-four years, we feel our house call is good on banking so alpha can be generated by playing themes over taking the risk of a small cap-fund.
Just before you came in, we were talking to Swarup Mohanty of Mirae and he was saying that they are playing infrastructure through diversified themes because infrastructure funds have flattered to deceive in the past, they’ve been too cyclical etc. But there are a few funds out there. When you analyse those funds, what do you feel about them and do you think that there is maybe a good fund or a set of funds with which investors can play the infrastructure theme as well?
MAHAJAN: We actually have to look at this budget. I must say this is a disruption which this budget has caused. May be after 1991, this is the budget where the message is very clear that the country wants to go at the rate of growth, which is a different level. So, we are very clear how to go from here. Second thing, I agree with Swarup that in the past, in 2006-07 when there were a lot of infrastructure funds that were launched, but in the fixed income cycle, the rate cut or maybe interest rate cycle there, it turned around and because of that, interest rates for all infra companies have gone high, but that was a different time, and these are different times as we are in lower interest rate times. At the same time, right now, the government push in the infra piece is huge. You see, they created a zero-coupon fund through which they can raise money for infra-projects. At the same time, there’s a lot of focus on rail, a lot of focus on shipping yards and a lot of focus on overall infrastructure also. Just to give you a perspective, they have recently included air-conditioning as a part of your PLI schemes because cold storage is a very important part of our country. Agriculture is one of the key sources of income for most of the people in countries — still close about 50% of the population. All these will give a big push to all these companies and infra as a theme will play out very well. Having said that, yes, it’s a tactical call. A tactical call means that one is your long-term portfolio that you make and other is a tactical call which is you see if there’s a turnaround in a sector, let’s say in a theme like infra and you play out. So, one should look at participating close to 5-10% of overall equity portfolio in infra as a theme. Along with that, one can look at adding commodity as a basket or portfolio in his overall allocation. If you are new to this mutual fund investment piece, you should look at participating through a diversified portfolio. If you are an existing investor and you understand this investment piece a little better, then you can look at adding one or two funds from infra as well as commodity space because at the same time commodity will get benefited from infra turnaround, as well as the commodity cycle in itself is turning around. So, we feel that there is a tactical allocation which one can look at, be it infra as well as in commodity.
Is it possible for you to maybe give us what funds would you be comfortable telling investors to put their money in on the infra side? And you mentioned commodities, what do you mean there? Do you believe that there are some funds that allow you to play this theme?
MAHAJAN: There are funds and we can go one by one. On the infra side, we as a company like a couple of funds—Invesco Infra Fund and Tata Infra Fund. In fact, what we do at our end as we go level two in terms of looking at the top 10 holdings, looking at the earnings numbers also. We said in these both funds there is a lot of story which is building up and one can look at participating 5-10% allocation across these two funds. They are very well buoyanced in terms of their portfolios, if you see most of the portfolios, these two portfolios’ top holding is L&T and at the same time, NTPCs, Reliance Industries. But the idea is that one should look at participating in a fund when they understand that this can be tactical as an allocation. So, maybe the story can be for 16-18 months or two years or 2.5 years. So, you have to be a little more watchful while allocating funds.
On the commodity side, there are a couple of options. One is the DSP Natural Resource Fund, which is a very unique fund in itself because it participates 70% of its allocation in Indian commodities and 30% they participate through BlackRock Commodity Fund across the globe with the DSP New Energy Fund wherein they look at renewable sources of energy. So, one can look at that fund and the second fund which one can look at is your ICICI Commodity Fund, which is a pure commodity fund wherein 100% allocation is in Indian commodity and if you actually look at the allocation piece, it has Tata Steel, Hindalco and JSW Steel as top holdings in this portfolio. Both the funds on the commodity side also are very brightly placed to talk about as on date. So one can look at participating in the overall portfolio, about 5 to 10% across these two categories.
A quick counter question on the Invesco Infra Fund as well as the ICICI Prudential Commodities Fund. Their AUM is sub-Rs 100 crore. Is that a worry from the size perspective? Also, is it that these funds are very new or if they are not new, then why is it that they haven’t gotten the allocations? So, is that a cause of worry or not really?
MAHAJAN: Invesco Infra Fund is almost 13 years old and it used to be a lock-in fund. It got launched in 2007 and then it became an open-ended fund and as rightly said by Swarup, after 2010, we have not seen much of action in this space. So not much of money has been gathered in this fund. Having said that, it has been managed by Amit Nigam who is one of the key fund managers and they’re doing really well. I do want to talk about the performance that they have given but I’m saying expectedly from the portfolio right now which is there, it seems like this portfolio will do really well for clients. So, the AUM should not be a worry because the guy who is managing the AMC is having a right construct in their mindset and how they want to run this fund. Similarly, with the ICICI Commodity Fund, it is a pretty new fund and it’s been three years in existence... One can look at participating in this fund also. AUM should not be a worry if you see that it’s been managed by the right guy and it’s been offered by the right AMC...
I would request you to tell us about a scheme, which you are comfortable telling all your key clients to invest fresh money into right now. I mean there could be various schemes but choose one. What should be the time horizon while doing this? Why are you recommending that and please let us know if you or your firm in any fashion get any kind of commissions or otherwise because you’re making this recommendation as well. Just the standard disclaimer would help.
MAHAJAN: First, whatever we’re recommending has just been shortlisted at our end and in our AMC. There’s no push from any AMC what funds we’re talking about here. I want to make it very clear; this is totally on internal research. When you ask about a fund, I will like to tell everyone that I want to talk about a couple of funds and not one. One is SBI Focus Equity Fund and second is, Axis Focus 25 Fund. Both are in the multi-cap focus category funds ... Right now, markets are the 50,000-plus level on the Sensex side. Markets were at 25,000 and 35,000 also, we say that whenever you want to participate in equity, the best way to participate is to stagger your investment, park your funds in a liquid or in any debt fund of your liking and then do a weekly STP, let’s say for 10 weeks or 12 weeks depending on the market scenario... So, let’s talk about both of the funds separately. Axis Focus 25 is focus multi-cap fund and has been very consistent in its portfolio and has a very low churn on the portfolio side. At the same time, the underlying companies what it is holding, is able to deliver good earnings numbers in the last quarter season also. So, we see that this fund from here onwards, can be a part of a core portfolio for any of the clients who’s looking into buying mutual funds. It has 40% odd allocation on the banking and financial side and 18%on the technology side, which is the right number in line with Nifty. Now coming to the SBI Focus Equity Fund, it complements the Axis Focus 25 Fund and both of which can be a part of your portfolio. The beauty of SBI Focus Equity, how it is different from Axis Focus 25 is, they can take 10% allocation in international funds and stocks also. So right now, they have Alphabet and Microsoft close to about 9% in their portfolio and in the product mix as well as in terms of sector allocation also, it is different from Axis 25 too. It has 27-28% on the banking side, it goes to about 8% on the technology side as a sector allocation and it’s been managed by Srinivasan who is the CIO for SBI Equity Funds. It’s been very consistent for the last 15 years and it’s deliverable. So, both the funds can be a part of any clients’ core portfolio.