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The Mutual Fund Show: Here’s Why Investors Must Brace For Volatile Markets Till May

After a tumultuous 2018, equity investors must brace for volatility till the general election in May.

But that shouldn’t deter them from investing in mutual funds through systematic investment plans, said A Balasubramanian, chief executive officer of Aditya Birla Sun Life AMC, in BloombergQuint’s weekly series The Mutual Fund Show. “2019 should be a comeback year for the mutual fund industry and markets due to favourable macro variables like stable interest rates, benign crude oil prices and stabilisation of the most important tax structure—goods and services tax,” he said.

Mutual funds under various categories failed to return gains of over 10 percent last year, according to a BloombergQuint analysis, with small-cap funds returning negative 7 percent. That was because the benchmark indices fell after an initial surge due to fluctuations in crude oil prices; the U.S.-China trade war; a weaker rupee; and defaults at the IL&FS Group that sparked a selloff, a credit crunch at non-bank lenders and fears of market contagion.

Balasubramanian—who has worked for over 26 years as a portfolio manager—said that the next five years of the India growth story will be better due to, among other factors, an improved tax-GDP ratio, reduced fiscal deficit, higher spend on infrastructure and higher liquidity.

Fixed income schemes, according to the fund manager, should perform better in a falling-to-stable interest rate scenario. His pick in the equity asset class was multi-cap funds, which give money managers the flexibility to move funds between small-, mid- and multi-cap classes.

Here’s Balasubramanian’s checklist for investors in 2019:

  • Investing in mutual funds isn’t all about equity.
  • Focus on asset allocation.
  • Stick to the discipline of investing at regular intervals.
  • Have a clear long-term goal.
  • Tolerance to volatility is a must.
  • Consider some investments in index funds and exchange-traded funds.

Watch The Discussion Here:

Edited Transcript:

Do you think 2019 will be a comeback year?

Definitely, 2019 could be a comeback year for many reasons. Investors faced a lot of uncertainty in 2018. We faced lot of troubles on equity markets and macro variables affecting India’s progress such as oil, interest rates, and inflation. Volatility in the Indian equity markets was among the highest in the emerging market basket. So, 2018 was not a great year.

But at the same time there are many macro variables which have been impacting India’s growth like oil, interest rates and inflation. All of them are turning more favorable for India. India being one of the biggest importer of oil, if oil stabilises, there are many things which will get stabilised along with oil like currency, interest rates, inflation, import-export parity, current account deficit. We will see multiple areas improvement coming back.

On the back of macro variable changes expected, 2019 could be a better year.

It is also the year of GST (goods and services tax). It took a lot of time to stabilise. We are getting into stage where GST is not only getting stabilised, but the government is now open to look at GST rates in two-three buckets. Assuming the scenario, it will not only benefit the government, but also consumer space and the companies that produce these goods and services in terms of reduction of service tax which means that majority portion will benefit the consumer at large and some portion will go to the companies. If companies benefit, they have to come back with earnings growth too which would be better than 2018.

If we look holistically at 2019, many variables will be favourable for India among the emerging markets. It would be also seen by global investors especially in a time where developed economies are going through their own pain points. Especially the latter part of the year -- last 2.5 months or so -- was tough for developed markets including the fall in Japan, and the U.S. And especially FAANG companies which are Facebook, Apple, Netflix, Google which have fallen sharply.

The money moving to emerging markets will be real and probably higher than we have seen in last few years. So, net-net it is going to be a good year.

You believe that in 2019 if the investors are starting SIPs, then they should not be short-term SIPs but long term?

I always say it is perpetuity. I have SIPs for perpetuity. Though I have another 9-10 years for retire, still I sign for perpetuity. When you don’t want to continue, the withdrawal is in your hand. You can cancel it by yourself. It is not like an EMI on a loan and you need to think of it after retirement. Here you are going to make an investment. So, sign up for perpetuity. Whenever you think that you have created enough wealth, stop the SIP. It is something which every investor has to do.

Most of the time people make one mistake. They subscribe for SIP, and if the SIP portfolio is not giving good returns and they start measuring their success in one-two year performance basis, they get disappointed and then they cut their SIP. That is the biggest mistake everyone does in both bull and bear markets.

In a bull market, they will subscribe to an SIP and in a bear market, they will withdraw the SIP. No investor should make this mistake.

Most investors should not stop the SIP. Even unknowingly, if you have stopped as you are not tracking it, please start the SIP quickly after it. Continuing the SIP in 2019 and beyond will be crucial. The mistake which investors should not do is to cut the SIP in between.

You are of the view that investors should consider some investment in index funds and ETFs. Why is that?

Globally, if you look at how the asset management industry is evolving from active management to passive and then passive to active, it keeps shuffling between two asset classes. 2018 was the year where domestic money managers were not able to beat the benchmark. They were able to beat the benchmark on 3- and 5-year period. We will go through a tough time. There are some years when money managers will be able to beat the benchmark and it doesn’t mean it is bad. The market will go flat. So, you will not be able to beat the benchmark.

In order to satisfy yourself and overall asset allocation,considering some proportion of investment invested in index funds and ETFs, it takes care of your two concerns which are expenses of actively managed funds and the generation of alpha. Some of your funds will generate index returns and you don’t lose out on it.

If you look at it holistically, by allocating some portion of your investments in index funds or ETFs, and the majority in actively managed funds whether equity or liquid funds, you will get a well-constructed portfolio. And your experience will be better.

You have recommended aggressive balanced funds, banking and financial funds and consumption-focussed funds. What’s the reason for you recommending them, considering that banking and financial funds have gone through turmoil in the last six months?

The assumption we make is that the worst is behind us. As far as the financial sector is concerned, the sentiments are improving. The Insolvency Code is helping large wholesale banks recover past non-performing assets. With interest rates getting stabilised, they will be able to capture large part of retail growth which is continuing in the country. Banking sector is a proxy for the economy. So, that is one of the thematic categories which I am suggesting.

From an India point of view, irrespective of the government, global volatility and political conditions, one thing which remains permanent is the consumption theme. Whether we like it or not, the large population of the country does benefit the consumption industry. You will be able to find winners in consumption space which can give you longer and better experience to investors. Therefore, some portion of allocation should also go towards consumption-led theme within the mutual fund space.

Can I say that you are lot more optimistic at the start of 2019 than what you were midway through 2018?

Yes. I keep saying that worst is behind us. 2019 would be a better year than whole of 2018. I am sure it will give a better experience to everyone.

Also read: Lessons For Mutual Fund Investors From 2018